No. of Recommendations: 35
I know pretty much nothing about how to spot a secular market top. The main prerequisite is that the rear view mirror look like a secular bull market (check) and that valuations look high (check). But those two things are true probably half the time.
However I can put a number on how bad things can be at a secular bear market bottom. (or how good, if you're a stock buyer)
Let's optimistically assume that S&P 500 earnings in recent years are not unduly elevated - i.e., helpful US tax rates and deregulation and market concentration and corporate interest rates and demographic tailwinds and geoeconomics will not go materially into reverse. In those circumstances the long run smoothed level of real earnings is a very useful yardstick as future earnings (actual stock values) a pretty similar to extrapolations of the past.
One can say with some confidence that, merely on the assumption that reported earnings mean roughly what they used to, if the S&P 500 were valued today on trend earnings as it was at the 1982 lows, adjusted for inflation the index level would be 1087 right now. Now *that's* a secular bear. The typical stock would get you a cyclically adjusted 16-17% earnings yield on your purchase price, with a 6.6% dividend yield.
Along the same reasoning, if the market were merely valued today at its average level since 1990 (i.e., its average earnings yield using smoothed real earnings), the S&P 500 would be 4362 right now, 32% lower.
So if a bear market or secular bear market were to begin, there is potentially a lot of air under us. It is sometimes said that "hope" is not a strategy. But in this case, we don't have much else.
Jim
