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Why This Isn’t A Secular Bull Market at Trader’s Narrative

Why This Isn’t A Secular Bull Market

David Rosenberg, strategist at Gluskin Sheff continues to be staunchly bearish. He digs into his trench even further it seems with each point the S&P 500 climbs. Today he lists the contrasts between now and 1982 to argue why this is not a secular bull market:

  • P/E Multiples were 8x, not 26x.
  • Dividend yields were 6%, not sub-2%.
  • The stock market was trading at a discount to book, not a 2x premium.
  • Monetary policy was aimed at reducing money growth and inflation rates, not
    creating both as is the case now.
  • Fiscal policy was aimed at reducing nondefense spending, not accelerating it.
  • Deficits were peaking and coming down, not surging to 10%+ relative to GDP.
  • Global trade barriers were being torn down; not erected.
  • Deregulation back then was in; today it is all about re-regulation and
    government ownership.
  • Union membership was on the way down; today it is back on the rise.
  • The dollar was entering a Plaza Accord bull market, not a mercantilist bear
  • Credit, household balance sheets and participation rates were expanding, not
  • Tax rates, income, capital gains and dividends, were declining then; rising now.

He also compares the batch of government bureaucrats and politicians now to back then:

In 1982, Ronald Reagan was President (two consecutive terms as Governor of
California), Don Regan was Treasury Secretary (35 years of financial sector experience), Martin Feldstein as the Chief Economic Advisor to President Reagan (the dean of business cycle determination), and Paul Volcker was Fed Chairman (9 years of prior financial sector experience). Compare and contrast to Barrack Obama (junior senator from Illinois for 3 years); Timothy Geithner (21 years experience in government, three years as a lobbyist); Larry Summers (no private sector experience; 27 years of academia and government) and Ben Bernanke (no private sector experience; 30 years of academia and government).

Which team do you think deserved the higher multiple — the one with actual experience in the real world or the one immersed in academia and government?

To play devil’s advocate, no two bull markets are equal in every way. It is a stretch to require a secular bull market to require experienced politicians for example. But cheap (or at least, reasonable) valuation is a condition that is difficult to explain away.

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10 Responses to “Why This Isn’t A Secular Bull Market”  

  1. 1 Market Speculator

    When you print the crap out of the dollar and let the banks play with the cash you will see it finds it way into riskier asset class…stocks!

  2. 2 burt

    Merrill’s Rosenberg: A New Bull Market? Are You Out Of Your Mind?
    Henry Blodget
    Apr. 2, 2009, 6:27 AM

    Merrill’s departing economist thinks the S&P will trade between 475 and 650 “for an extended period of time.” That’s 20%-40% below today’s level.

  3. 3 dasa

    hey, burt! Very good point! )))

  4. 4 wayne

    Mr. Rosenberg makes some good points and an excellent case for bearish view, but I’m not sure it is fair to compare PEs in 82 to 09, because of the difference in interest rates. For example on November 17, 1982, the five year treasury note was yielding 10.46%, compared to November 17, 2009, where it is yielding 2.18%. Investors are going to require more of a earnings yield from stocks when they can get double digit returns on 5 year interest bearing securities.

    On that same day of November 17, 1982, I have trailing 12 month earnings of 13.56, and a SP of 133.57 for a PE of 10.15, which inverts to an earnings yield of 9.8% very comparable to the 5 year treasury note (10.46%) on that day.

    2009 end of the year earnings are going to be 45-50ish, which with the S&P at 1100, equates to an earnings yield of 4.5-5.0%, which one could argue compares favorably to the 5 year note today of 2.2%

  5. 5 biscosc

    Wayne -

    What was the situation like after WWII? I’ve seen charts showing low P/E’s back in the late 1940’s early 1950’s, but I’m not sure how much higher interest rates were then than they are now. Plus, maybe govt rates were artificially low coming out of the war? I’d like to hear your take on this.

  6. 6 wayne


    Most of my data sets that I use on a daily basis go back to 1970. but I have access to annual Tbill and earnings data going back to 1950 somewhere. I’ll try to look into it tomorrow.

    I do recall at one time seeing the charts you reference and making the observation that from a valuation perspective, that the 50’s were probably the best time in the last century to invest in equities as history has now observed that there was an incredible aversion to risk for a couple of decades after the depression and WWII. Seems I recall for a small period of time in the 50s, 2% interest rates and PEs of 10, which the Bears could argue could happen here. But don’t quote me, let me see what I can dig up.

    I have seen the risk aversion argument made in the last year for why stocks can not back to old levels here as well. The permanent cash refuge argument. But then again, many thought the same thing in 74 and late 87, but another run on the banks could affect retail investors view of equities for a long time. Headed home, check back tomorrow.

  7. 7 wayne


    Your question deserves a full study and not just a comment, but you get what you pay for and here is what I could come up with tonight.

    If you google Shiller data and pull up his excel file you can find earnings and 10 yr bond yld data going back a century. I used his data to put together the table below,

    of Yr S&P500 1YRERN Eyield 10YRBD Diff
    1949 0016.52 02.32 14.00 02.32 11.68
    1959 0059.06 03.39 05.74 04.69 01.05
    1969 0091.11 05.78 06.34 07.65 -1.31
    1979 0107.80 14.86 13.78 10.39 03.39
    1989 0348.60 22.90 06.56 07.84 -1.28
    1999 1428.68 48.17 03.37 06.28 -2.91
    2009 1110.32 50.00* 04.50 03.32 01.18

    * estimating $50 for 2009 earnings and using todays sp and 10 yr bd yld)

    Some observations.

    1. The earnings yield is the P/E inverted or the theoretical dividend yield if all earnings were paid out. Since 1960, there has been a very strong correlation between interest rate yields and the earnings yield on the S&P 500 I actually have daily data going back to 1970 and have found this to be the case in more detailed analysis than above.

    2. However, in the 50’s, the market carried an enormous risk aversion factor and stocks carried a much higher Earnings yield than could be found on interest bearing securities. I’m not an economist, but I have seen this attributed somewhere to the effect that the depression and WWII had on investors pshche for the following 10-15 years. Maybe someone can reference a study or chip in an explanation. I have some colleagues whom I will inquire with as well.

    3. The once in a century spread between earnings yield and interest rate yields in the early 50’s offered an incredible buying opportunity as the market increased by some 250% over that decade.

    4. But the 64 million dollar question is, “Are there conditions in place today that could contribute to a situation where stocks abnormally sell down into single digit PEs while interest rates stay at current levels”, the likes of which hasn’t been seen since 1950.

  8. 8 biscosc


    Wow, thanks for the effort! Very interesting, indeed. The only piece of information missing might be the spreads between government and corporate bond yields in 1949. Might it be possible that coming out of WWII the government rate was artificially low compared to the corporate rate? Somewhat like we just experienced recently? At any rate, the question going forward you asked in #4 is certainly the most important. I think Rosenberg is arguing that this is exactly what will happen and he might be right. Personally, I believe there has been enough research in the last few decades on the long-term performance of equities to give people confidence to buy stocks when the Earnings Yield vs 10-year yield gets too far out of wack, thereby not allowing valuations get so low as in 1949.

  9. 9 burt

    I have a graph of the Schiller numbers vs. future returns of the stock market at:
    I will turn it into a system and backtest it later this week.

  10. 10 wayne

    Be aware that in my table of data, I used 1 year trailing earnings, Shiller uses 10 year trailing earnings for much of his calculations

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