Actually, the Bear Market Might Be Ending
While I do not disagree with some of Michael Markowski's interpretations of the current market environment, interpretational frameworks sometimes lead us to the wrong conclusion. I agree that this has been a secular bear market, but in my opinion that does not preclude significant gains over the coming months.
First of all, it is much easier to agree that this is a secular bear market than to define its beginning or end. Unlike for recessions, there is no National Bureau of Economic Research to define when bear markets start or stop. Michael believes the bear that began in 1929 ended in 1949, 20 years later. Yet Ned Davis Research, a noted financial-industry source for statistics on economic and financial market cycles, marks 1939 as the end of that secular bear. The fact that two assessments of that market differ by 10 years suggests just how difficult it is to judge how long this secular bear market will last.
To complicate things even more, Ned Davis Research marks 2000 as the beginning of this secular bear, coincident with the bursting of the technology stock bubble. I believe the economic conditions after the recession that followed the 2000 peak support that assessment. Consequently, even if this has been a secular bear market, after nine years, it could be ending.
The market still has room to run
Defining the current market as a secular bear market implies that we should remain highly defensive until it ends. Yet in many secular bear markets, the market low comes well before the bear market officially ends. To illustrate, in the 1906-1921 market, the low occurred in the first two years. During the 1929-1939 market the low came in 1932. And in the 1966-1981 secular bear market, the low came about midway through in 1974. Importantly, too, a market crash such as the one we saw last fall has often taken us to the low of the secular cycle. Last year's market crash, coupled with the history of past secular bears, suggests we may have seen the low of this cycle.
Nor does a continuing secular bear market preclude significant investment gains. In June of 1932, for example, the market hit its low of the cycle. From there, the market rallied 89 percent in two months, and remained at least 25 percent above the low from that point on. By late 1937, each $1 invested in June of 1932 was worth as much as $2.50. Yet that rally was entirely contained within a secular bear market. Rallies of 50 to 60 percent are actually common within continuing secular bear markets, often playing out over the better part of a year or so. (Thanks again to Ned Davis Research for their extensive analytic support on this topic.) Although the market has risen sharply in the last two months, historical experience suggests significantly more gains could lie ahead.
As for the negative economic and financial data that Michael cites, that is common as markets rally out of economic contractions. Consider again June of 1932. As the market rose 89 percent, we were still months ahead of the "Bank Holiday" that closed 2,500 banks. Market rallies anticipate improvement. Although interest-rate spreads remain wide, they have begun to narrow -- and seem likely to narrow more. The power and character of this rally have been impressive. While the secular-bear backdrop makes me vigilant, the history of secular bear markets suggests this rally has room to run.
Note: McCain's opinions reflect those of the Investment Strategy group at Key Private Bank.
Follow Blog War on the future of the stock market:
- Bruce McCain, 6/1: This Bull Market Has Legs
- Michael Markowski, 6/2: The End of This Bear Market Rally Is Near
- Bruce McCain, 6/3: Actually, the Bear Market Might Be Ending
- Michael Markowski, 6/4: This Bear Market Still Has Claws