Note from dshort:Â With the early release of the June employment report I forgot to post this routine monthly update. Thanks to Ron’s friendly reminder, here it is!
Was the March 2009 low the end of a secular bear market and the beginning of a secular bull? Without crystal ball, we simply don’t know.
One thing we can do is examine the past to broaden our understanding of the range of possibilities. An obvious feature of this inflation-adjusted is the pattern of long-term alternations between up-and down-trends. Market historians call these “secular” bull and bear markets from the Latin word saeculum “long period of time” (in contrast to aeternus “eternal” — the type of bull market we fantasize about).
The key word on the chart above is secular. The implicit rule I’m following is that blue shows secular trends that lead to new all-time real highs. Periods in between are secular bear markets, regardless of their cyclical rallies. For example, the rally from 1932 to 1937, despite its strength, remains a cycle in a secular bear market. At its peak in 1937, the index was 29% below the real all-time high of 1929. For a scholarly study of secular bear markets, which highlights the same key turning points, see Russell Napier’s Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms.
If we study the data underlying the chart, we can extract a number of interesting facts about these secular patterns (note that for the table below I am including the 1932-1937 rally):
The annualized rate of growth from 1871 through the end of May (the latest month for which we have an inflation rate) is 2.19%. If that seems incredibly low, remember that the chart shows “real” price growth, excluding inflation and dividends. If we factor in the dividend yield, we get an annualized return of 6.80%. Yes, dividends make a difference. Unfortunately that has been less true during the past three decades than in earlier times. When we let Excel draw a regression through the data, the slope is an even lower annualized rate of 1.75% (see the regression section below for further explanation).
