Where do we go from here?

Are we in a secular bear market or bull?

From today, can you reasonably expect above-average secular bull returns like we saw in the 1980s and ’90s or do we face another decade or longer of below-average secular bear returns?

The current secular bear began in 2000 and has lasted well more than a decade. The surges and falls are relatively consistent in both magnitude and duration with past secular bear market cycles. With valuation levels still relatively high as measured by normalized P/E, this secular bear has quite a way to go.

Since bears start where bulls end, the starting level for P/E in secular bear markets is generally in the red zone on this chart. The obvious exception is the most recent secular bull, whose dramatic end in a bubble gave our current secular bear quite an extra distance.

This chart overlays stock market performance and valuation. The power of this chart is that it (1 ) demonstrates the strong effect that valuation has on future returns, and (2) provides a gaze at the future for likely returns over the next 10 years!

The line in the chart is valuation, as measured by P/E. The bars in the chart reflect the 10-year total return for the S&P 500 Index. The line is shifted forward 10 years so that the P/E aligned with each bar is the value for P/E at the start of the 10-year period.

Peaks in the line correspond to troughs in 10 year returns. Similarly, dips in the line correspond with peaks in 10-year returns. Valuation matters! The rightmost bar on the chart is the period 2010 – 2019. P/E fell significantly in 2009, setting up the potential for great returns over the subsequent decade. The market delivered! Since then, P/E not only rose, it surged! The current level of P/E is very high, which portends a decade that will likely deliver low compounded returns.

The future bar under the end of the line (and dot marking July 2020) will reflect the cumulative compounded average return for 2020-2029. If history is a guide and the principles of valuation remain, then we are looking at low single digit returns on stocks in the coming decade.

By Terry Grennon

Asset Allocation Strategist