Man the Lifeboats

Source: wikimedia

Today’s chart, from the folks at Crestmont Research, speaks volumes about current investor behavior.

In particular, it calls into question claims being bandied about in the mainstream media that we could be at the start of a new secular bull market in US stocks.

It shows that previous secular (long-term) bear market cycles tend to start when the US stock market is trading on a Shiller P/E – a price-to-earnings ratio is based on average inflation-adjusted earnings from the previous 10 years – of between 20 and 25 (blue-shaded area on the chart).

This is true of the 1901-20… the 1929-32… the 1937-41… and the 1966-81 secular bear markets.

And the “lost decade” for US stocks that began in 2000 started out with the stock market trading on a Shiller P/E of more than 45!

You can also see that the Shiller P/E range for when secular bull markets start and secular bear markets end is between 5 and 10 (pink-shaded area on the chart).

Right now, the S&P 500 trades on a Shiller P/E of 26.5 – higher than the historic range for the start of secular bear markets and the end of secular bull markets.

Does that mean US stocks can’t go higher from here?

Anything is possible in a world where central banks are manipulating stock and bond prices.

But it should at least give long-term investors buying into US stocks at current valuations pause for thought. History shows that when the stock market is this richly valued, secular bear markets tend to follow.

Reprinted with permission from Bonner & Partners.