Monday, February 15, 2016

2/15/2016 Grin and Bear It

Whenever a bear market growls, the two questions on everyone’s mind are how bad it will be and how long it will last.

I don’t know. In truth, no one ever knows, nor do they even know if they are in a bear market until that magic 20% drop is reached, and by then the drop is mostly over.

There are those, of course, like Hussman, who have been particularly bearish for years based on Shiller’s cyclically adjusted price to earnings ratio. Others have happily ridden the market up. The rest, like myself, have merely been perplexed.

I don’t time the market for the simple reason that I have no talent for it; and I’m skeptical of anyone who claims that they do.

At the most, I’ll look at the very long range demographic “timing” of secular bear versus bull, but even then such broad brushed projections merely expose the fact that is known to most old school investors: hold long enough and the market always goes up.

Still, there are multi-decade periods in which the market does not go up, but produces wild swings in both directions. These swings ultimately lead nowhere, but suck investors into alternating bouts of terror and euphoria in which they pile on margin at market tops and cash out whatever is left at market bottoms. The swings are milder in secular bulls, but secular bears are the main drivers of retail investors losing money in both directions. We have been in one of those periods since 2000, and even if March 2009 does turn out to remain a generational low, it was still not the end of the secular bear.

A “secular” market is driven by demographics. Ned Davis was perhaps the first to note that the birth rate 46 years in the past (i.e. the average age of the workforce) will drive the long term direction of the market today. It’s not an exact relationship, but it is rather strong. I’ve noted this in previous posts, but I’ve recently revised the stock graphs by using a standard deviation channel of the log of the S&P, rather than the nominal price. The deviation channel of the log gives a stronger correlation:

Even so, the 2009 bottom appears to be an outlier. I’ve speculated in previous posts whether technology or quantitative easing could have accelerated the median age of the birth rate match from 46 to 36, which would have ended the secular bear in 2009.

But now that we have matched back up with the 46 year correlation that Ned Davis first identified, 2009 may simply have been that Black Swan financial contraction that has now merely normalized.

Good news?

Well, not so much. If indeed we HAVE lined back up to the 46 year correlation, then we have another three years left to go on this secular bear.  This three year continuation of the secular bear would explain why the Fed is stress testing banks for deflation now.

But how does that translate for folks saving for retirement?  Should we stop saving?


The “bottom” that we see for 2019 on the deviation channel is against the long term rising slope of the market. Add that slope back into the projection, and we get a 2019 “bottom” around 1600 on the S&P – annoying, but not the end of the world. And a dip even further below 1600 would merely be the set up for a long term secular bull that would taper off around 2036, but not crash like the retirement of the baby boomers did in our present secular bear. In other words, we are unlikely to see anything like 2008 for the rest of my lifetime.

That projection looks like this:

We are presently in a cyclical bear market in the midst of a secular bear market. That’s (doubly) bad, but it’s not the end of the world.

And the end of both of these short and long term bears will be a good set-up for our retirement savings. Those of us saving during these next three years will wonder what all the effort is for, but after those years are over, those who have not saved with us will realize that they missed out.

The market is still a retirement tool. And, in the end, those who treat it like a retirement tool generally do better than those who treat it like a casino.

For the next three years we’ll have to grin and bear it – pun intended.






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