These secular cycles continue to play out even today. The beginning of the next major secular bull market was 1982. Driven by technology and finance, 18 years later, the broad indices had gained more than 1,000 percent.
These things always end with the markets getting way ahead of themselves. By 2000, the Nasdaq was over 5,000, the S&P 500 over 1,500, the Dow just under 12,000. Here we are more than a decade later, and all three major indices are below those peaks. And if history holds true, the current secular bear market probably has a few more years to run. It’s a fair guess to say we are in the seventh inning or so.
Where does that leave us? Since the post-crash lows of March 2009, markets have enjoyed a nearly uninterrupted cyclical uptrend. (We did have that little bother with the flash crash in May 2010, but what’s a structural hollowing-out of capital markets among friends?)
These trends are why savvy traders tend to give markets the benefit of the doubt. Experience teaches us that they can run longer and further than we should reasonably expect. That is why the end of any intermediate-term trend can take some time.
The rally that began in March 2009 looks to be running out of steam. Indeed, those gains have been among the best post-crash rallies of the past century. Only the 1932-33 and 1935-37 runs saw stronger rallies over a two-year period. The first saw the Dow Industrials double in two months. It gave back nearly all those gains by March 1933. From that low, the Dow once again doubled by July, only to give back about 26 percent by October 1933. And the next bear market rally — a two-year screamer from March 1935 to March 1937 — saw an astounding 135 percent in gains. That ended in yet another collapse, this time of 56 percent.
Compare that with the current run — the S&P 500 gained 105 percent from March 6, 2009, to May 6 of this year. It is getting harder to believe this run is still intact.
Life — and investing — is all about probabilities. We don’t know what is going to happen in the future — certainly not with any degree of confidence.
What we can surely assess is a range of possibilities as to what might happen. To my eyes, it appears that the cyclical bull run within that broader secular bear has run its course. We are now in the midst of pricing in a slower economy, weaker profits — and lower stock prices.
I”ll say it again: Investors should adjust expectations — and their portfolios — accordingly.
Barry Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, The Big Picture.
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