“We received a phone call over the weekend from a close friend and someone who reads our comments religiously. He had a question for us.
He wanted to know if we were still in the secular bear market camp or have we thrown in the towel since the economic news has gotten much better and virtually every index is either at or close to new 52 week highs or are fairly close to all time highs. He explained that it looked to him that the European risk has moderated, the China “collapse” has evaporated, the jobs and housing problems of the U.S. have now clearly turned.
We responded that we are still in the secular bear market camp and, in fact, are surer than ever that we are close to a significant peak in the market. He responded, “Please, explain yourselves.” This is the logic we used.
First of all, we explained that this market (using the S&P 500 index-but DJIA and NASDAQ could also be used) has been in a secular bear market starting in 2000. You have to agree that the market sold at extremely high levels during the dot.com bubble before bursting in 2000 (the NASDAQ was much worse). Starting in 1998, when the market traded at extreme levels, the S&P 500 traded at 920 (with a P/E of 20 -the area of past peaks) before peaking at 1550, with a P/E multiple of 32 times earnings in March of 2000 (NASDAQ traded at 245 times earnings).
Of course, you could go all the way back to 1994 when the S&P sold at 440 but was not at extremely high valuation levels. So, we are talking about a market that was overvalued in 1998 and has never since then traded at levels that could be considered cheap or even inexpensive after trading at extremely high valuation levels at the peak in 2000. So essentially, the stock market has not been considered inexpensive for the past 14 years and we surely expect the stock market to trade at typical bear market trough valuations (7 to 10 P/E) after two major bull market scams (dot.com & housing)….”
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