Secular Bear Market Investing | iStockAnalyst.com

Last week, David Rosenberg?(via Pragmatic Capitalism)?stated that "we're just 4 years into a depression that will likely last 7-10 years". Ken Rogoff, interviewed in CFA Magazine, said that the current slowdown that began in 2008 is likely to take 6-10 years for a recovery to take hold.

This is a secular bear
This confirms my views from August that I expect a stock market bottom about the end of this decade. This is a secular bear market characterized by flat returns and investors need to re-orient their investment policy and portfolio strategy accordingly.

To recap my first point about a secular bear market, equity valuations are not especially attractive right now. The chart below from VectorGrader (chart is theirs, annotations are mine) shows the market cap to GDP of U.S. equities from 1950. I use market cap to GDP as a proxy for the market price to sales ratio. Many investors look at P/E ratios, but P/Es can be volatile since P/E = P/(Sales x Net Margin) and net margins can be volatile depending on where you are in the economic cycle, but price to sales is a far more stable ratio for evaluating long-term market valuations.

Note how the bull phases, or secular bulls, coincided with expansion of the market cap to GDP ratio. The equity market then topped out, went sideways and entered a secular bear market, which coincided with a corrective phase in the market cap to GDP ratio, until that "valuation" metric returned to more realistic levels.

Similarly, this chart from Naufall Sanaullah of Shadow Capitalism tells a similar story. The chart shows the require amount of work to buy the SPX as a measure of the differential between the returns to labor and capital. Just like the market cap to GDP chart, this relationship remains stretched in favor of equity.

Source: http://www.istockanalyst.com/finance/story/5548738/secular-bear-market-investing

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