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?
Hardly.
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.
Tim
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