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Boeckh Investment Letter

Investment and economic commentary by J.Anthony Boeckh and Robert Boeckh

Why the Secular Bears are Wrong

Be Wary of a Consensus

There is a pretty widespread consensus that U.S. stocks are in either a secular bear market or a sideways trading range that will last for years. Such a view is not surprising since a consensus is almost always formed by what has already happened in the recent past, an experience that has not been kind to equity portfolios. In the last 11 years, the U.S. experienced two of the worst bear markets in history and the S&P 500 is still 16% below its all time high in early 2000 in nominal terms. After adjusting for price inflation, it is down about 35%.

Defining secular bear markets in stocks is not straightforward. They are generally thought of as lasting a long time, sometimes ten years or more. However, that is not always the case. The magnitude of decline is also a key factor and a dramatic decline that takes prices to unsustainably low levels can shorten the secular bear market very substantially. Also, looking at total returns changes the picture considerably because dividend yields are high after a steep market decline. Nonetheless, we will focus just on the trend of stock prices which is more conservative, (i.e., shows weaker performance) and provides a sufficiently accurate picture.

Some think of secular bear markets as lasting until the previous highs have been sustainably exceeded. However, this approach is not very meaningful for those dealing with the future and making asset allocations accordingly. Others would define secular bear markets as those in which valuations (e.g., P/E ratios) continue to fall. That can be interesting information in the sense that falling P/E ratios create a headwind for stock prices; but what ultimately raises investor wealth and improves balance sheets, is rising stock prices. As a result, we consider secular bear markets to be those where prices are trending down or, in the case of bull markets, trending up.

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