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http://www.hussman.net/wmc/wmc121210.htm
....We continue to view the stock market as being in a “secular bear” – a period that includes a series of separate “cyclical” bull and bear markets, with the defining characteristic that successive bear market troughs move toward increasingly depressed levels of valuation. Secular bears begin from elevated valuations – generally Shiller P/E’s well above 18 (the ratio of the S&P 500 to the 10-year average of inflation-adjusted earnings), and typically end about 14-18 years later, at depressed valuations and after a number of separate market cycles. There are certainly many periods during a "secular" bear market when it makes perfect sense to take moderate and even aggressive "cyclical" risks, but it is worth noting that the average "cyclical" decline in a "secular" bear has wiped out about 80% of the prior bull market advance.
As a severe example of a secular bear period, the Shiller P/E reached 25 in 1929, and plunged to less than 5 by 1932, but despite significant gains off of the 1932 low, valuations eventually settled back to a Shiller multiple of just 7.5 by 1942. From the standpoint of prospective returns, we estimate that valuations were consistent with negative 10-year prospective returns on the S&P 500 at the 1929 peak, but with prospective returns near 20% annually at the 1942 low (see the chart in A False Sense of Security).
Similarly, at the 1965 valuation peak, the Shiller P/E reached 24, plunging to less than 9 by the 1974 low. But while 1974 marked the low in price, it was not the low in valuation. The secular bear continued into August 1982, when the Shiller P/E reached 6.5, at which point the prospective 10-year return for the S&P 500, by our estimates, was again nearly 20%. Future outcomes may be different, but the historical record suggests that extended "secular bull" periods typically emerge from durable valuation troughs, and those troughs are generally associated with prospective 10-year S&P 500 total returns in the range of 15-20% annually. At present, our estimates hover around 4.5% annually even without assuming future undervaluation.
The problem with the late-1990’s market bubble was that it took valuations well beyond those of 1929 or 1965, to a Shiller P/E of nearly 44 by the 2000 market peak. The 1.3% annual total return, including dividends, achieved by the S&P 500 from that point through last Friday’s close, was a fairly predictable result of that overvaluation. What is undoubtedly difficult for investors to accept, however, is that even the 2009 market low took the Shiller P/E only to 12 (and a prospective 10-year return only slightly over 10% by our estimates). The multiple is presently above 21 again.
Now, if the S&P 500 had achieved significantly different returns over the period since 2000 than we actually projected on the basis of normalized valuations, one might be inclined to disregard our valuation concerns as somehow outdated or unreflective of new realities. But we’ve observed no such disparity. Moreover, there's no evidence that our valuation methods are locked in a bearish mode. Even our own estimates of prospective 10-year returns (which are based on a variety of normalized fundamentals well beyond Shiller multiples) indicated – I believe correctly – that stocks were modestly undervalued at the 2009 low, though I certainly don’t believe that 2009 represented a secular low. ,,,,,,,,,
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