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The 210 year trend of the market and where we are at with respect to it



July 09, 2010 – Comments (20)

Here we go, the bull and bear case from a peek at history.  I started my last blog by saying that Mark Twain once said "history doesn't repeat itself, but it does rhyme".  This blog aims to take a look at history, particularily the history of equity performance in the US (and parts of the rest of the world). 

The bad news.  As this post will have overtones of buy-and-holdism, and overtones of perma-bullism, I will start with the bearish cases.  The bearish case is found in a look at bear markets.  The current one started in 2000 and hit what was probably its climactic low in 2009.  So its pretty old (10 years) and its very severe (bested only by the great depression era), but it is not likely over yet.  The bear market of the 70's arguably began in 1968 (and arguably began in 1972, as a significant new high was put in in 1972, but we'll use 1968 for the heck of it).  It contained 4 cyclic bear markets (20% drop or more) and a long 5 year flat period with less or more no gains.  That environment was highly inflationary... in the short run inflation doesn't tend to be good for stock markets, at least then, but in the long run equities rise with inflation.  So all in all, the inflation may have actually reduced the severity of the market OR enhanced the potency of the subsequent bull market.  This environment is very low inflation, many fear deflation, and that may act to extend the length of the bear OR reduce the potency of the first segment of the next secular bull.   A "pro" to this secular bear is the current low inflation and extremely low interest rates, part of the deep value seen in stocks in the late 70's was a function of the extremely high interest rates you could earn on "riskless" investments.  Treasuries were paying 15%, bank CDs at one point were paying >15% according to my father.  Why buy stocks?

But using that as an example, and assuming that the 70s (a very bad time, where many were predicting the imminent end of western civilization and predicting future doom) were about as bad as today (similar predictions of imminent end and future doom)...  and considering that this secular bear started with higher valuations than did that one, and with indices farther above their long term trend, I think it is reasonable to assume that this secular bear is likely to pass that one as the worst in post WW2 history.  The Nasdaq may well pass the DJIA of the 1930's and 1940's for longest time to make a new high.  

I don't think thats pessimistic, fear-mongering, or gloom-and-doomy, I think that the above comments are reasonable.   To assume this market will be as bad as the one of the70s when its all said and done... would mean that the S&P would have to be at or below about 1500 at 2014 or later. 2015 or later would beat the 70's for length of time between peaks.  Gun to my head I'll go out on a limb and say we have S&P 1500 or lower in the mid-latter half of this decade, thereby beating that bear by several years.  And, if history is any guide, the bulk of this decade is likely to be volatile, uncomfortable,and quite possibly not all that profitable to either bear nor bull (history doesn't suggest that we have to crash again, and in fact kind of suggests that a second truly severe crash isn't entirely likely).  

Thats the bad news:  history does not suggest that we are likely at the onset of a new secular bull market at this time.  Rather, it suggests that the secular bear, while mature, is probably not yet ready to die of old age. 


And now for the good news.  

Little precedent for a second crash so close to the first one, or for a 3rd big crash in a single secular bear market.  There really isn't any precedent in history for a third severe crash at this time.   Big blow-out significant bottoms like the one in 2009 do not tend to be immediately followed by another market tank.  In fact, big bears (which look like fairly benign blips on a 200 year chart, even as they cause many to fall into despair if not jump out of windows) don't tend to happen close together at all.  The lows of 1974 were never approached again during theremainder of that secular bear, nor were the lows of 1932.  In fact this secular bear has featured 2 dips within 10 years of ~50% or more, a feat matched only by the great depression era markets.  

In fact the 07-09 decline of >50% was followed by a decline of nearly 20% just a year after the first decline ended, and that is rare.  In 1932-1934, the depression, the DJIA bottomed at 42 (per yahoo finances long chart), then rallied 75% (similar to us now) only to drop 30% (equivalent of us dropping now to S&P in the high 800s), only to rally 100% to significantly higher highs just a year later.  All of that drama happened inside of 2 years, the 75% snap-back rally then happened not over a year, but over a couple of months.  

That doesn't meant it couldn't happen.  It could, anything could, but it would a new event in history for the markets to really, significantly crash anew here.  I am not here to make predictions, I am here to look at history.  

The trendline - we are well below it.   From Jeremy Siegel's book "stocks for the long run", and from Dreman's book on contrarian investment strategies, we find a most interesting thing.  The return of stocks over extremely long periods of time (like a lifetime) has been remarkably consistent at around inflation+6-7%.  This is through times we were on the gold standard, times we had inflation, stagflation, civil war, depressions, world wars, aliens landing in Roswell, from being a tiny beginner nation to preeminent world power, Bill Clinton getting some helmet in the oval office and everything else.  That return has been remarkably constant.  See here:

We have long periods above, and long periods below, that trendline.  A long period above it ended in 2008... no doubt giving way to a long period below it.  That is correct, folks, we did not significantly breach that trendline in the 2002/2003 market lows, and rose well above it again in 2007.  We were profoundly below it at the march bottoms in 2009, and are below it today.

You may argue that this trend is no longer relevant because the world changed.  I would counter with the following chart:

There you have it.  That chart includes all of the following:  Britain fell from almost absolute world power with the world reserve currency, experienced (i think) a soverign default, and has no reserve currency status nor superpower status, along the way it got half its brains bombed out by the Germans in WW2.  The US rose from an upstart "emerging market" to reserve-currency-having preeminent world power with no wars on its soil for 150 years.  Germany lost 2 world wars, had its entire brains bombed out, and was never preeminent world power or holder of reserve currency.  Yet through all that, over extremely long periods of time, the return on their stocks was...  the same.  Bears could argue that Japan has fallen quite a ways behind, but bulls could counter-argue that cultural differences exist, possibly that businesses are run to maximize employment -vs- maximizing profits (or so I have read).  Bears could argue that lower dividends will reduce that because the buybacks that have (truly) replaced the lost dividends aren't as effective at improving shareholder value and, frnakly, I would call that a good point.   

So where are we now on this majestic chart?  About S&P 1400. So we sit 25% below the trendline.  For buy and hold investors, not concerned with the short term, maybe dollar cost averaging in over time, this is bullish.  The shares you are buying now will probably have above average returns by the time you retire.

So what else can we find?  How far below that trend did stocks get in 2009?  In 1932?  1974?  How long have other secular bears remained below the trend?  Are share buybacks worth anything to shareholders or not?  Some approximate data for how far we were below the trend at various points in time:


1929 high:  +40-50%

1932 low: 40-50%

1968 high:  +25%

1974 low:  -40ish%

2000 high:  +50-60%

2002 low:  about 0% (we hit the trendline there)

1970 low:  about 0% (we basically hit the trendline there also)

2009 low:  about -50%, this is about as bad as its ever been, folks, per this estimate and a rough guess

today:  about -25%

In the 1968-1982 secular bear, the first cyclic bear brought us to the trendline, the same thing happened this time.  The second cyclic bear took us well below it, and we stayed below it for 10-12 years, rising above it only in the run-up to black monday, falling slightly below it again after black monday.  

We should expect the same thing, perhaps, this time around.  Below that trendline for 10-12 years from the second big cyclic tank.  So back to trend around 2020, when the trend will be at perhaps (assuming 2% inflation and 3% dividend yield over that time) 2200-2400.  

So assuming that the overall nature of this secular bear continues to fit with that of the 70s, admittedly a fairly loose assumption, we could expect stock returns of about 8%/year + dividends over the next 10 years, backloaded into the second half of the decade with the first half being dissapointing.  

If this secular bear goes a full 20 years, maybe we get to trend in 2025 around S&P around 2800-3000.  I calculated these by using 5% (a conservative 6% historical return -1% for dividends less inflation) return on the index value.  To some extent, that would be assuming that buybacks actually do help raise stock prices.

So the good news is that from here, based on a look at the historical trend, returns should be pretty good over the next decade or 2.  

The bad news is history does not suggest that we are done with this secular bear market, and volatile, mixed returns and another cyclic bear market indident or 2 awaiit us going forward.  Sucks.  

Overall, this excercise implies that stocks right now are probably cheap, and probably are a pretty good long term buy.  It also suggests that we aren't likely to re-take the trendline permanently for some years to come, and one should consider not holding when the market gets to 12-1300+.

None of this has any bearing on how the market behaves over the next X months or even X years.  

More to come in a few minutes!

20 Comments – Post Your Own

#1) On July 09, 2010 at 3:00 AM, checklist34 (98.69) wrote:

The last time we had a 10 year period where stocks were as far down (headline number on the DJIA) as 2009 was from the 1929 peak to 1939.

As todays companies return cash primarily via share buybacks...  whereas 1930's companies primarily through dividends...  it follows that a flat headline number now -vs- a somewhat lower headline number is the same actual return.  See what I mean?  

The last time we had a 10 year period where stocks were as far down as they are today over 10 years (headline # on the DJIA) was at and around the 1974 bottom OR 1968-1978.

The last time we had a 10 year period where stocks were as far down as the Nasdaq on an American index is never as far as I can tell.  

For a 10 year drop similar to the S&P as of TODAY, not the march bottoms, it would be to the 1974 bottom.  

That tech bubble was really, really big.  And to some extent that skews this kind of analysis.  buybacks -vs- dividends probably also skews it.  

But in any case, as of TODAY, even after the big rally from the march bottoms, we're in rarified historical air for how low returns have been over time.  

That doesn't mean they have to be better immediately going forward, but it does imply that another "lost decade" isn't likely.  2 "lost decades" haven't ever happened as far as I can tell, in a row.

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#2) On July 09, 2010 at 6:28 AM, cthomas1017 (98.45) wrote:

Past results are not a prediction of future performance.

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#3) On July 09, 2010 at 9:25 AM, AltData (31.85) wrote:

+1 rec

Good stuff !

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#4) On July 09, 2010 at 10:02 AM, binve (< 20) wrote:

This is a very thorough and well-rounded argument. Thank you for taking the time to make it.

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#5) On July 09, 2010 at 10:03 AM, rofgile (99.46) wrote:


 I agree with all your analysis - especially the analogy of the market to that of the early 70's.  If you compare our rally from 2009 lows to the rally that started in December 1974, it looks soooo similar.

 At the end of the rally July 1975, there was a sudden sharp correction leading to 10% losses in S&P.  Then, the rally continued (at a slower pace) till 1976 summer.  It recaptured the highs of 1975.

 Then guess what happens?  The market see-saws and net-gains to losses in the index are flat for FIVE YEARS.  There are 10%+- moves overall in that time, but bleh!

 YUCK!  That could be our market.  FIVE years to recover jobs, business lending, and reconstruct a new economy (with less dependence on consumer debt, housing, services) and with new regulations on finance, and oil drilling, and healthcare.  That's a lot to digest in a big economy!  

 Choppy and overall flat (with neither bulls nor bears making huge net moves) over the next five years is a possible future.

 The 1970's is also characterized by high inflation.  We've had inflation artificially low by the Chinese currency manipulations and cheap export policies.  Now that's changing as well - chinese currency is beginning to thaw from the peg, and Chinese workers are demanding higher wages.  Yes, there are cheaper countries to work in than China that industry could migrate to - but there is no other place in the world with the sheer manpower of China at its current wage levels.  So why shouldn't Chinese goods get more expensive?  And why shouldn't oil prices begin to rise again?  Stagflation, again, eh?

  On the positive side of things - now is NOT the 1970's.  The globalization and internet/mobilization of the world has created a different scene.  Things can change much quicker now, and information can flow much quicker now.  So, it is highly likely that things can rebuild faster, restructure faster than in 1970s. Further, we didn't have 1.3 billion people moving up the ladder to the middle class (China) in the 1970's - that's a huge driver of growth.


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#6) On July 09, 2010 at 10:23 AM, Griffin416 (99.97) wrote:

Absolutely, love non-bias statistical posts like this. +1 rec. Very well written and thought out. 

I would like to point out to those deflationary people, that deflation is usually a very short period of time and is almost always followed by higher than normal inflation. Inflation periods also tend to last a while.

To add to rofgile's point, the '70's a more like now. Aside from major budget problems and crazy price fluctuations, which we have now too, the 1970's we also a period a de-leveraging. For a nice '70 until now chart comparison check out:

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#7) On July 09, 2010 at 10:31 AM, MoneyWorksforMe (< 20) wrote:

Until the fundamentals change this market is trending down. In every market there are gyrations--sometimes significant ones---representing moves +/- 5 or 10%. But just simply look at the Dow or S&P leading up to the failure of Lehman and Bear Sterns--see how many investors bought back in, largely based on valuations in a deteriorating macro environment. Those who bought in search of long term "value" @ Dow 13,000, 12,000 and anywhere in between saw excellent p/e's based on past performances but subsequently were absolutely crushed. Unless the market becomes exceptionally undervalued with expectations set extremely low as it was immediately leading up to and ultimately peaking in March 09  it is extremely risky to buy equities strictly on the basis of "good" valuations in a deteriorating macro environment. A Greek default, which many say is inevitable could precipitate our next Bear Sterns type market movement.

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#8) On July 09, 2010 at 11:31 AM, vtBrunson (29.05) wrote:

Two Words:

"Survivorship Bias"

It was a good read, I just challenge that 7.0% number, and I guess I'm in the whole "Past results are not a prediction of future performance." camp.

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#9) On July 09, 2010 at 11:36 AM, vriguy (71.03) wrote:

Siegel's Future for Investors also makes the point that during the 1930s depression, during the entire stretch while the Dow was going nowhere, buy and hold investors in dividend paying stocks who held on made very significant gains, even if they had bought at the peak before the crash. That is one reason why I'm continuing to hold dividend paying stocks, and buying more on the dips when I've cash available. Other than paying down debt, are there any other investments with a comparable risk:reward ratio?

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#10) On July 09, 2010 at 1:05 PM, rexlove (99.70) wrote:

Anther great post checklist!

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#11) On July 09, 2010 at 7:08 PM, abitare (30.01) wrote:

bogus, total garbage chart.

First, which stock has existed since 1801?

None. RIght Which bond?

None right?

Which dollar? None right?


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#12) On July 09, 2010 at 7:50 PM, Option1307 (30.54) wrote:

Stellar post, thanks for sharing your thoguhts!

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#13) On July 09, 2010 at 8:02 PM, checklist34 (98.69) wrote:

cthomas, that is true in many situations, but with highly similar returns occuring across 2 continents and 3 countries with widely different experiences, it leads me to believe that this particular lesson from the past might be worth consideration. 

thanks blesto & binve, very much

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#14) On July 09, 2010 at 8:06 PM, checklist34 (98.69) wrote:

Rof, I think it is reasonable to think we have a shot at a better and more efficient outcome this time than the 70s also.  Hopefully, as time goes by, humanity gets better at life, however slowly.  You gotta admit, the tulip bubble was alot worse than the tech bubble.  So the most dramatic middle ages bubble was worse than our worst so far.  Thats progress, lol

I wonder if this time around the inflation, rather than being so dramatic and severe, would ultimately be a mildly helpful thing?  Inflationary pressures as you describe (starting with China de-pegging, etc.) working to offset the deflationary forces of deleveraging.  



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#15) On July 09, 2010 at 8:12 PM, checklist34 (98.69) wrote:

Griffin, thanks. 

Yes, deflation comes like a shock, historically, and isn't, historically, something that occurs over long periods of time except perhaps in Japan where they have (I think, i'm not a student of japan) had long periods of deflation mixed with low inflation, they never hit inflationary "escape velocity", so to speak.  

Assuming that the US does eventually reach an inflationary escape velocity again...  we could expect that deflation would come as a shock (ala 2008) and probably not when the world is braced and ready for it (ala now).  


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#16) On July 09, 2010 at 8:15 PM, checklist34 (98.69) wrote:

MoneyWorks, this post didn't attempt to address the current short or intermediate term trend of the market, it just attempted to address where we are relative to some history.  Where are we likely, per history, in this big secular bear?

Where are we likely, per history, to the oldest most consistent trendline I am aware of.  Whether to buy today or in a month or a year is not addressed here.

This post does suggest that buys made today and held for a long time (many years) are likely to look pretty good in the hindsight of old age.

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#17) On July 09, 2010 at 8:30 PM, checklist34 (98.69) wrote:


    firefox crashed and the much longer, and better, reply that I had composed to your note is dead.  As such, this shorter, suckier reply will have to do.

    I do not dispute the early numbers, as I do not know much about them.  But its likely that the failed companies had smaller caps and so forth, much like today.  How many hundreds of public companies have ceased to exist in the last year?  5 years?  I don't know.  But their entire cap probably didn't add up to one big blue chip, excepting recent history of course when lehman, bear stearns, fannie, freddie, etc., all died.

    Survivorship bias would have the opposite effect (deflating returns rather than inflating them) at tiems as well.

ACAS was kicked out of the S&P with a share price of a buck, since gone up several hundred percent.  Replaced by Hormel Food that has since gone up 33%.

Lehman and Stearns and Fannie and Freddie...  and GM...  and Citi...  all kicked out of major indices after losing all their value and replaced by companies that were strong and have not rallied as much as, for example, citi has since being replaced by CSCO in the DJIA.

Companies in trouble get booted out.  Replaced by companies not in trouble.  And all of the upstarts that grow to be big caps (like CSCO and MSFT and AAPL) get put into the indices only after their biggest growth.  For example, MSFT got put into the DJIA rather near its all time high share price.  

So survivorship bias could work both ways.  

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#18) On July 09, 2010 at 8:34 PM, checklist34 (98.69) wrote:

also, vtbrunson, alot of the companies that are gone aren't gone but absorbed.  A couple of centuries of M&A activity will leave very few brand names intact, but that doesn't mean that everything that was the vanished brand is gone from the earth.



if divi's are paid -vs- buybacks, the gov't gets more taxes, and, probably, shareholders get more long term value. 

I am just skeptical of buybacks in the biggest way.

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#19) On July 09, 2010 at 8:35 PM, checklist34 (98.69) wrote:

thanks rex, thanks option, I appreciate it.


abitare, I'm not sure that I follow your logic?  I see your point, only gold is eternal, but I'm not sure I see how it relates to the topic?

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#20) On July 09, 2010 at 8:49 PM, IIcx (< 20) wrote:

+1 great post

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