John Hussman seems committed to writing investment notes every week, which can’t be an easy task when he remains bearish and the markets are staying bullish. In this week’s note, though, he takes a slightly different tack, looking at the difference between secular and cyclical markets – and, of course, shooting down the notion that we’re in a secular bull market right now.
Cyclical markets tend to average about five years, he said, with the bull market portion averaging about 3.75 years and the bear market portion averaging about 1.25 years.
On the other hand, secular markets are broad advancing or declining periods that last considerably longer and overshadow the cyclical moves within them. According to Mr. Hussman, these periods tend to last 17 to 18 years, which is why the idea that we’re near the start of a secular bull market is very appealing to optimistic observers.
The last secular bull market started in 1982 and didn’t end until the dot-com bubble popped in 2000. Mr. Hussman argues that the last secular bear market began in 2000, and is still with us – yes, despite the impressive cyclical bound of the past three years.
Secular bull markets, he said, don’t come out of the blue but are rather born from very low valuations, which imply strong returns over the next decade or so. As he explains: “Both the 1947-1965 secular bull and the 1982-2000 secular bull began at points where stocks were priced to achieve 10-year returns of close to 20 per cent annually.”
By comparison, Mr. Hussman believes that high valuations point to annual returns for the S&P 500 of just 4 per cent over the next decade, after factoring in dividends.
While that might not sound too bad, remember that that is over a 10-year period, with a lot of bumps between now and then testing investors’ faith in the market. After all, the S&P 500 has produced a total return of about 50 per cent over the past 10 years – but investors had to endure the tail end of the 2000-to-2003 bear market and the 50 per cent crash that followed the 2008 financial crisis.
Back to Hussman: He argues that the current expected return of 4 per cent a year is even worse than where the 1965-to-1982 secular bear market started.
“Though interest rates are lower today than in the 1965-1982 period, satisfactory returns from present levels will require investors to sustain rich valuations indefinitely,” he said.