Opinion: U.S. stocks look like most of the 13 previous bear markets


Opinion: U.S. stocks look like most of the 13 previous bear markets

Bear markets are still hard to predict, and the next one is likely to be a long way off

New haven, Connecticut (Project Syndicate) – the U.S. stock market today is characterized by the experienced a strong earnings growth and very low volatility, looks very unusual combination of very high valuations.

These seemingly contradictory messages mean that the U.S. is moving toward a bear market in SPX stocks. + 0.70%?

To answer this question, we must look at past bear markets. This requires us to accurately define the results of the bear market. The media now describe a “classic” or “traditional” bear market as a 20 per cent fall in share prices.

This definition did not appear in any media until the 1990s, and there is no indication who established that definition. This may be due to the fact that the stock market fell by more than 20% a day on October 19, 1987. Trying to link the word to the story of “black Monday” may result in a 20 percent definition, and journalists and editors may simply copy each other.

The origin of the “20%” figure

In any case, the 20% figure is now widely accepted as an indicator of a bear market. There seems to be no obvious consensus during this decline. In fact, past newspapers often do not refer to the definition of a bear market. Journalists on this issue clearly do not think it is necessary to do so.

In assessing the past bear market experience in the United States, I used the traditional 20% figure and added my own time standard. By my definition, the pre-bear peak is the most recent 12-month high, and the next year should fall by 20% a month. Whenever there is a continuous peak month, I take the last one.

Referring to my monthly standard & poor’s comprehensive data and related data, I find that since 1871 there have been only 13 bear markets in the United States. 1892, 1895, 1906, 1916, 1929, 1934, 1937, 1946, 1961, 1987, 2000 and 2007. Some notorious stock market crashes – in 1968-70 and 1973-74 – are not on the list because they are more durable and gradual.

CAPE ratio

Once the bear market of the past are determined, it is time to assessment before they stock valuations, with colleagues at Harvard University, John Y Campbell and I are in 1988 an indicator to predict the long-term returns of the stock market. Cycle is adjusted p/e ratio (CAPE) through real (inflation-adjusted) stock index divided by the average 10 years, above average ratio means less than average. Our research shows that the CAPE ratio has a certain effect in predicting real returns over a 10-year period, although we have not reported on the ratio predicting a bear market situation.

This month, the U.S. CAPE ratio was just above 30. This is a very high proportion. In fact, from 1881 to today, the average CAPE is only 16.8. And, in this period, it was only twice over 30 times: 1929 and 1997-2002.

But this does not mean that the high CAPE ratio is not related to the bear market. On the contrary, during the peak months before the bear market, the average CAPE ratio was above the average of 22.1 points, suggesting that the CAPE did tend to rise before the bear market.

In addition, in 1916 (the first world war), 1934 (depression) and after (recession) after world war ii in 1946, three times a panda market CAPE ratio is less than the average level of a bear market. Therefore, the high CAPE ratio implies a potential bear market vulnerability, but it is by no means a perfect predictor.

Profitable rescue?

To be sure, there seems to be some hopeful news. According to my data, since 1881, actual standard & poor’s stock returns have grown by an average of 1.8% a year. From the second quarter of 2016 to the second quarter of 2017, real earnings growth was 13.2%, well above the annual rate.

But such high growth does not reduce the likelihood of a bear market. In fact, real earnings growth has tended to be high in the run-up to the past bear market, averaging 13.3% a year. Moreover, the 12-month real earnings growth rate was 18.3 per cent during the peak of the 1929-32 market’s largest stock market decline.

Another seemingly bullish message is that the average stock price volatility (measured by the standard deviation of the percentage change in actual stock prices over the previous year) is a very low 1.2%. From 1872 to 2017, the volatility was almost three times as high as 3.5 percent.

Volatility is low

However, that does not mean a bear market is not coming. In fact, the stock market price volatility has been below average before the peak months of the past 13 us bear markets, although today’s levels are below the average of 3.1 per cent. In the peak months before the crash of 1929, the volatility was just 2.8%.

In short, the U.S. stock market today looks a lot like the peak before the country’s 13 previous bear markets. That’s not to say a bear market is guaranteed: such episodes are unpredictable, and the next one may be a long way off. And even if the bear market comes, for those who don’t buy at the top of the market and sell at the bottom, losses are often less than 20%.

But my analysis should be a warning of complacency. If investors have a false impression of history, leading them to take on too much stock market risk today could incur considerable losses.

Yale University (Yale University), 2013 Nobel laureate in economics, economics professor Robert j. Shiller (Robert j. Shiller) and George Akerlof (George Akerlof) wrote “phishing: the economics of manipulation and deception”.


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