For the past ten months, the Four Bad Bears overlay has been a regular feature of this website. Let's pause a moment and review those individual bears in the larger historical context. Here is a nominal chart of the S&P Composite since 1871 with our Four Bad Boys highlighted in red.
Now let's look at a real chart (inflation-adjusted) of the same data, this time with a trend line drawn by Excel. The real chart also includes callouts showing market valuation at the tops and bottoms of the four bears using the P/E10 ratio.
Then let's study a "real" close-up of the Oil Crisis, Tech Crash, and Financial Crisis.
There are a number of observations we might make:
Over the long haul the inflation-adjusted chart gives a more "realistic" view of price performance because it removes the money illusion created by inflation.
The 1929 bear was a decisive move from an all-time high to a secular bottom. In contrast, the Oil Crisis, Tech Crash and Financial Crisis were cyclical declines within larger secular bears. This fact is obsured by inflation, but it is readily seen in our "real" close-up.
The Crash of 1929 and the Oil Crisis moved the index price decisively from above trend to below trend. The Tech Crash and Financial Crisis together caused a brief dip below the regression to the March low, but at present the market remains above the 138-year trend.
As the close-up shows, the Oil Crisis was part of a secular bear that saw the P/E10 ratio drop from 22.3 to 6.6 over a 14 year period. The current P/E10 is hovering around 18 — above the historic average of 16.3 and far above the single-digit lows of secular market bottoms.
The summer rally has triggered much debate over the question of whether the March low was a market bottom. This website has been running a new series that variously compares rallies in our notorious Four Bad Bears. But even a cursory examination of secular trends shows us that nominal highs and lows aren't the same as "real" highs and lows. The bottom of the Oil Crisis in 1974, for example, was still eight years away from the true secular bottom, which occurred in August of 1982. Perhaps the March low in the S&P 500 was indeed a secular bottom. Perhaps. But regression to trend and market valuation suggest caution in making such an assumption.
