The Secular Bear Market in 4 Stages
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August 28th, 2009 by Prieur du Plessis, Investment Postcards from Cape Town
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The debate rages on as to whether global stocks markets have turned the corner and are in the early stages of a new secular bull market, or whether we are experiencing a secondary bear market rally (or cyclical bull phase) within a primary bear market.
Although I am not a big proponent of averaging data across multi-year cycles, an analysis of the various stages of a typical secular bear market by Teun Draaisma and the strategy team of Morgan Stanley Europe nevertheless provides food for thought. The chart below shows what a typical secular bear market looks like based on the average of the past 19 major bear markets around the globe.
Considering the aggregate data, the team summarized their findings as follows:
“Each involved a peak-to-trough decline of at least 40% lasting at least a year. The median of these bear markets showed a 57% decline over 30 months.
“The usual rebound rally is 71% over 17 months … Structural bear markets are always followed by a strong rebound, typically from the moment authorities take decisive action.
“A turn in the rate cycle is often the trigger for the next correction. Often the peak in the rebound rally has been around, or prior to, a change in the interest rate cycle.”
“Broad multi-year trading ranges followed the initial rebound in 10 of 19 bear markets. In most cases, structural problems in the real economy acted as a headwind to a new bull market, such as financial bubbles, high debt levels, fiscal deficits, current account deficits, deflation and high inflation.”
Looking at the present situation with the MSCI World Index up by 57.7% and the S&P 500 Index up by 52.4% since the lows of March 9, the Morgan Stanley team concludes: “If the aftermath of these 19 secular bear markets is anything to go by, the current rally could go on a bit longer; is likely to stall a few months before the first Fed rate hike, which we expect in Q3 of 2010 … and is likely to be followed by some sort of trading range for years to come because of the structural problems of financial sector and household deleveraging as well as the poor state of government finances.”
For those interested in the data of the various secular bear markets and subsequent movements, the table below makes for interesting reading.
Click here or on the table below for a larger image.
Source: Teun Draaisma, Ronan Carr, Graham Secker, Edmund Ng and Matthew Garman, Morgan Stanley European Strategy, August 10, 2009 (hat tips: The Big Picture and proshare), August 27, 2009.
Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.
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