Wednesday, August 16, 2006

Are We Still in the 2000- Bear Market?

I just came across Ian Gordon's website, which has some interesting charts of the Kondratief cycle. He plots the actual stock index (rather than growth rates) alongside the Kondratief cycle and other variables such as interest rates. From looking at his charts it seems to me that there could be two types of "secular bear markets". One is short and sharp like 1929-1932. The other is sideways and protracted like the late 1960s and 1970s etc. The short bears happen at the beginning of the Kondratief Winter - the final stage in the descending wave of the Kondratief cycle. 2000-2002 would then be another of these short bears. People looking for future stockmarket lows below those of 2002 and a protracted sideways bear market would be wrong if this conjecture is correct. Instead a bull market with corrections would be underway for the next 15 years or so. Of course there only appears to be a bear market still underway that started in 2000 if you look at large cap US stock indices and some European indices. Look at small cap US indices or Australian stocks for example and we appear to be in a bull market.


makingourway said...


That's fairly exciting and optimistic news. How do you compare it with Bernestein's long terms views of 3.5% annual large cap equity gains with small caps going up to 7% (over the next 20-40 year period)?


mOOm said...

I haven't read Bernstein. Is he talking about price changes or total return? 3.5% seems low for total return even after inflation to me. The thing is because of an increasing share of profits in GDP we have got down to a P/E near historic averages at this point. Assuming this share of profits in GDP is maintained we should see going forwards a total return equal to E/P+ the % change in real GDP. That would be something like a 7-8% total real return. In the 1982-2000 bull market returns were above that because P/E ratios were rising from a very low level. Bears think returns will be low going forwards because they think that P/Es will decline to historic lows of 8 or so. They might do that eventually, but based on Kondratief that might not happen for 30 years.... Of course the share of profits in GDP might fall back again to historic lows. I think though we are in a more permanent shift to higher profit levels...

So the bottom line is there are lots of scenarios out there. None of the reasonable ones point to the extremes of either the 1982-2000 bull market or another great depression.