An interesting chart came across my desk that showed the last two major moves up for the S&P 500 of about 100% from 1996 to 2000 and 2002 to 2007 and the subsequent declines of 49% and 57% respectively. It also has the current ~200% up move since 2009 followed by question marks.
Excellent graphic and conversation piece and it dovetails right into our outlook and long term projection for the next cyclical bear market to be of the garden variety (~20-30%) and to mark the end of the current secular bear and the beginning of the
Next Super Boom. So I ran the numbers on the last two secular bears versus the current one.
One of the implications of the question marks is to strike fear in the hearts of investors that since the current up move is double that of the previous two that the next down leg will be even greater than the last two. I suspect the opposite. As illustrated in the three charts below greater upside magnitude does not necessarily beget greater downside.
Examine the secular bear markets of the 1930s and 1940s and the 1970s and 1980s and see for yourself. I suspect the action of the next cyclical bear market will exhibit similar behavior as the final cyclical bears of the prior secular bears. In the previous two secular bears the first and middle down moves were most severe while the third and final of a more average magnitude.
At the end of the previous two secular bears in 1949 and 1982, at the outset of the secular bull markets and global booms, there was a massive shift in leadership and sector rotation. After WWII at the end of the 1940s the shift went from agriculture to manufacturing – Ike’s “military-industrial complex” he spoke of in his farewell address in 1961. In 1982 it was the shift from manufacturing to integrated circuits, computers, the internet and cellphones.
Over the next few years we will likely begin the next sector rotation from high-tech to the new leadership sectors, which may be biotech, healthcare, energy tech, cyber security or something I cannot possible fathom that is currently under development in someone’s garage or lab.
While I firmly believe there is still upside left in the stock market as per my annual forecast, we do appear to be beginning a topping process that make take many moons, yet may occur later this year or early next year. Whenever the top comes (and we’ll be tracking that in the near term), we expect the bulk of the downside to transpire 2016-18 when the next secular bull is likely to begin.
Let’s face facts. Equities are no longer cheap; stocks are a bit rich by many metrics. The Fed is no longer providing the excessive liquidity as it has been in recent years, while other central banks are getting much easier. The US has benefitted from a weak dollar, which has recently gone from undervalued to fairly-valued. Our long/short equity strategies may help diversify, compliment and protect your existing stock portfolios.