Stages of secular bear markets
The debate rages on as to whether global stocks markets have turned the corner and are in the early stages of a new secular bull market, or whether we are experiencing a secondary bear market rally (or cyclical bull phase) within a primary bear market.
Although I am not a big proponent of averaging data across multi-year cycles, an analysis of the various stages of a typical secular bear market by Teun Draaisma and the strategy team of Morgan Stanley Europe nevertheless provides food for thought. The chart below shows what a typical secular bear market looks like based on the average of the past 19 major bear markets around the globe.
Considering the aggregate data, the team summarized their findings as follows:
“Each involved a peak-to-trough decline of at least 40% lasting at least a year. The median of these bear markets showed a 57% decline over 30 months.
“The usual rebound rally is 71% over 17 months … Structural bear markets are always followed by a strong rebound, typically from the moment authorities take decisive action.
“A turn in the rate cycle is often the trigger for the next correction. Often the peak in the rebound rally has been around, or prior to, a change in the interest rate cycle.”
“Broad multi-year trading ranges followed the initial rebound in 10 of 19 bear markets. In most cases, structural problems in the real economy acted as a headwind to a new bull market, such as financial bubbles, high debt levels, fiscal deficits, current account deficits, deflation and high inflation.”
Looking at the present situation with the MSCI World Index up by 57.7% and the S&P 500 Index up by 52.4% since the lows of March 9, the Morgan Stanley team concludes: “If the aftermath of these 19 secular bear markets is anything to go by, the current rally could go on a bit longer; is likely to stall a few months before the first Fed rate hike, which we expect in Q3 of 2010 … and is likely to be followed by some sort of trading range for years to come because of the structural problems of financial sector and household deleveraging as well as the poor state of government finances.”
For those interested in the data of the various secular bear markets and subsequent movements, the table below makes for interesting reading.
Click here or on the table below for a larger image.
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