CYCLICAL BULLS WITHIN SECULAR BEARS & THEIR SHORT DURATION
John Hussman has some good data from Nautilus Capital regarding the average duration of cyclical bull markets within secular bear markets. If we indeed remain in a secular bear market then the current cyclical bull run could be nearing its end or even extended:
“You might expect that when the market is gradually working down from a high level of overvaluation, bull markets would tend to be shortened, and bear markets would tend to be deeper. In fact, that’s exactly what we observe. As the guys at Nautilus Capital note, cyclical bull markets within secular bears have tended to average just 26 months, with an average gain of 85%, while cyclical bears within secular bears have averaged 19 months, with steep average losses of -39%. So market cycles tend to be truncated during secular bears, averaging a full bull-bear duration of just 3.75 years, for a full-cycle average gain of just over 12% (3.3% annualized). Of course, fundamentals still tend to grow faster than 3.3% over the cycle, resulting in valuations that are lower at each bear market trough, even if prices are higher in absolute terms. I recognize that outcomes like these are unpleasant and inconvenient to contemplate, but denying the possibility doesn’t make anyone a better investor.”
Source: Hussman Funds
So, what do I take away from this data? Short the S&P500?
2002-2007 seems to be an extreme outlier. So does 1938.
This seems way too sketchy to be of any predictive value.
Provides some macro perspective. That’s all. I don’t think it’s intended to be used as any sort of trading call and I wouldn’t view it that way…..
The average is very misleading when the range of data is so wide.
Even if you remove the highest and lowest bull duration, there is still a spread of 21 years.
It’s very difficult to take anything useful from this. One can data mine and find all kinds of things, but I think this is a bit spurious.
how is this data mining or spurious? its a table with the returns of cyclical bull markets within secular bears over the past century. that’s it. draw your own conclusions.
Nice table. You’re making a big assumption that we are still in a secular bear market. Its also become very fashionable (again) lately to be calling tops. What flaw in human evolution causes pundits to call tops even though the long term record is so awful for every one of these Nostradamus wannabees?
Where’s the assumption that we’re in a secular bull market? I don’t see it.
But I do see “If we indeed remain in a secular bear market”.. Note the “if”.
These kind of comparisons are very useful in the sense that human nature/psychology is fairly constant over long periods of time–several hundred years. Which is to say that if a market moves x%, up or down, over a period of time there will be a fairly constant human reaction. It is not a coincidence that analogues of great stock movements, bull and bear, have remarkable similarities in terms of shape, price and time. Analyzing the current background and then finding the right analogue ahead of time is the treasure map.
The take away is pretty straightforward. During secular bear markets the cyclical up swings tend to be shorter and have smaller advances and the cyclical downswings tend to be longer and deeper.
Secular Bear markets being defined as markets moving from a period of high valuation to a period of very low valuation.
Low valuation being defined by methods which have proven not to justify current levels, but have shown to correlate with subsequent returns (dividend yields, shiller P/E, regression to trend, and other methods.)
That such markets have been characterstic of the past is not in question. This is just showing that the expectation I described is in fact what happens and also gives an idea of how secular bears get to that lower level of valuation.
If you are looking for trading information, short term there is none. However, it should inform how you conduct your trading. The risk reward of trades is different in this environment. Your system should be based on an expectation of larger potential drawdowns and that major drawdowns will be more frequent. As upswings get older they should be treated with extreme care.
If you are looking for times to sell based on the time periods mentioned then this data will not help much except as to the need to tighten up risk control measures.
John Hussman has been pretty much wrong this enitre move up. He should rename his fund to the Timex fund. It’s always right twice a day. Just stay way from the S&P 500. Besides historical earnings from the S&P 500 may be of very little help now that >40% of thier earnings come from outside the U.S.
Almost all of his issues have to do with March 2009 through the end of the year. If you removed the markets performance and his performance for that period his record he looks fantastic. He admits he was wrong then and has explained why. His performance since then is a function of his view on valuation. On that he is not wrong, that pays off over time as the data above illustrates.
That is not to say he gets a pass for that error. However, as an investor one should understand what that error was and not use it to generalize to other views or conclusions, or assume that it implies likely underperformance in any other time period. To do so would be to make the same error that people used to judge many investors in the late 1990′s or in 2006 and 2007 (including Hussman) whose advice should have been listened to much more closely.
I find it interesting that people continue to take him to task on things that are not about his judgement. He points out that the market is overvalued and the risk reward over time is therefore bad, and people say “he has been wrong.” As if that somehow makes the data wrong for him to be the one pointing it out. Or, for that matter, it makes him wrong to point it out and not have the market go down over some arbitrary timeline. The data is what it is and that it doesn’t play out in some particular way or it is pointed out by someone you don’t agree with on some other aspect of investing is irrelevant.
Furthermore, on this topic (valuation and its impact on returns) we can say he has most emphatically not been wrong. He has for a long time released estimates of what the market would return and they have proven very accurate. Except for in rare instances when it comes to shorter term moves he always says his views give no guidance. To complain then that his guidance hasn’t been “right” about shorter term moves seems pretty silly, or more dangerous if you are an investor, a way to justify ignoring relevant data because it doesn’t fit your preferred conclusion.
Such criticism also implies an impatience with probability and instead preferring to judge things based on a particular outcome, regardless of the fact that markets may roll double sixes (or snakeyes) in the short run no matter how bad (or good) the odds are. That is another trait which over time will lead to large losses.
Yes stocks are overvalued. So are bonds, Treasuries, commodities, and real estate. Everything is overvalued, which is the way Bernanke wants it – as long as ZIRP is in effect.
“Besides historical earnings from the S&P 500 may be of very little help now that >40% of thier earnings come from outside the U.S.”
First of all, that is a misconception of a study of international earnings by S&P. It is not true.
Second, even if it were accurate, it wouldn’t change much at all.
Third, as an empirical fact there is no evidence that S&P earnings are influenced by the proportion earned overseas. Historical earnings from overseas have been increasing for many decades and we see no discernable difference in the earnings growth rate overall.
An increasing share of earnings from overseas could be depressing dividend rates due to the tax cost of repatriating the profits. Thus, overseas acquisitions becomes a better use of foreign earned capital.
Possiby, but that is why using various measures of value with proven reltionships to susequent returns is important as a check.
I should note that if so we should still see faster growth in real dividends if not in yields (which we have not) over the decades.
We should also see faster growth relative to GDP over several decades, which we have not.
So, I see no evidence a higher proportion of earnings from overseas leads to higher returns for the S&P.
Furthermore, we should expect a larger more vibrant world of trade to lead to lower returns on invested capital if anything. More competition.
However, you are making a conjecture. You may not be in a position to do so, but I often hear from professionals conjectures about what will lead to higher returns than in the past to dismiss lomg standing methods. Fine, but prove it, show your work. I would suggest they almost never even attempt to do so.
I can share some personal experience. True, these data alone are not terribly useful if not complemented with a richer trading/asset allocation framework. Having said that, just the fact of knowing that a bull market is happening inside a larger bear cycle is extremely useful can provide very useful insight.
One immediate insight is that standard valuations are likely overstating the value of stocks because the “risk premium” is growing (i.e. there is a P/E compression cycle going on). This helps, for example, identify the “true” causes of the market rally in reasons “other” than plain fundamental valuation: e.g. behavioral optimism or monetary intervention. And if one has a better diagnose of what moves the markets, it will be easier to know which signs to watch to know it will be ending.
Another insight is that one simply keeps an eye open for signs of when the bull market may end. That’s because ending it will. However, based on the considerations above, one will need technical signals as well, because fundamental signals will be off.
Many people like to belong either to a “fundamental” or a “technical” camp when investing. The key take from these cycles is that one needs a combination of both, especially where “technical” is interpreted as being anything that is behavioral, fiscal, etc … I think people like Hussman can get the analysis correct, but tend to be overly anchored to a purely fundamental approach and refrain from investing in a robust trend which is driven by non-fundamentals or pseudo-fundamentals.
I have found this approach to be of practical personal value.
“John Hussman has been pretty much wrong this enitre move up”
You are so ignorant!
John Hussman has a very long term view and he is a very long term investor. However it’s always a pleasure to read his ideas.
HSGFX 3/6/09 @$12.56
HSGFX 5/16/11 @$12.42
It’s worse than that actually. You haven’t made money in Strategic Growth since 2004. Of course, his longer track record is far better and crushes the S&P, but he’s definitely been in a drought for a while now….
http://www.hussman.net/pdf/hsgperf.pdf
Brilliant economist, not so great investor. At least not lately…
The historical data do not account for what seems to be driving the markets since March 2009, which is: ignore mark to market on financial assets; extend and pretend; the impact of Fed creativity; and QE1 and QE2.
A guess: the markets take a swoon in late June as QE2 ends and the Fed stays silent; interest rates drop; Greece starts turning into Lehman Brothers; Wall Street eggs on market masochism and deflation fears; the ECB steps in to avert Lehman shock; and then QE3 “saves the world” in August to the cheers of Wall Street. Throw technical analysis, fundamentals and historical comparisons out the window. It’s all about perceived risks and central bank intervention to stave off disorderly deleveraging (or even orderly deleveraging) and to defer recognition of losses by TBTFs.
Hussman also thinks our federal govt has a debt/deficit problem (too much, that is.)
I think that’s why permabears will always lose in the long-run because they always bank on some sort of sudden debt collapse. If they understood that the fed govt has all the tools it needs to restore prosperity they wouldnt be so bearish.
Hussman does not believe what you assert he does. He believes unproductive debt financed spending will lead to inflation down the road, which is similar to Cullen’s claims in the past.
His concern is inflation not default.
He also is not a perma bear. He has projected low returns based on price, which has been and is accurate. High prices lead to low returns. That isn’t opinion, it is basic math. His opinions on the economy are only a relatively small input. Thus no matter his opinion on the economy he would project low returns.