6 Charts That Make The Case We Are In Long-Term Secular Bear

Tyler Durden's picture

Submitted by John Mauldin via MauldinEconomics.com,

As I look out over the coming years, I am convinced that we’ll see the blowing up of the biggest bubbles in history - including those of government debt and government promises. And it’s not just in the US, but all over the world.

That will lead to an eventual global crisis of biblical proportions. Although, it isn’t clear what the immediate cause of the crisis will be.

Let’s start with some basics

The most common way to measure valuation is with the price-to-earnings ratio (P/E). Analysts compile P/E and other indicators from many companies to give us valuation metrics on entire markets and indexes.

You can see overvaluation and undervaluation in this chart from my friend Ed Easterling of Crestmont Research.

The red line is the combined P/E ratio of the S&P 500 as originally reported. The green and blue lines are adjusted Crestmont and Shiller versions, which occasionally diverge. The P/E ratio spent most of the last century between 10 and 25.

Presently, all three P/E versions are near or above 25, indicating overvaluation. This doesn’t mean the end is near—though it could be. But it does suggest that we are not at the beginning of another long-term bull market.

P/E adjusted to economic growth

The next chart illustrates the past and present trend in a different way.

Direct your attention to the dashed line.

It’s Ed’s long-term earnings baseline, which he adjusts to reflect the relationship of earnings to economic growth. Reported earnings per share go below the baseline during bear markets and above it in bullish periods. Currently, it is way above trend and is projected by S&P and many others on Wall Street to become even more so.

The Buffett indicator

The Buffett Indicator is essentially the market value of all publicly traded securities as a percentage of GDP. Intuitively, it seems odd that the combined value of every public stock would be worth more than the country’s annual production. But sometimes it is. Those periods tend to mark overvaluation, as you can see here.

The interesting thing here is that right now, the Buffett Indicator—while down from its late 2014 peak—is still higher than it was before the 2008 financial crisis. That should not be encouraging if you’re a bull.

S&P 500 median since 1964

The next chart is from Ned Davis and shows us the S&P 500 median P/E back to 1964, which is 16.9 (dotted green line). The distance we are above or below the median is a valuation clue.

Could the market get more overvalued? Absolutely. It did in the tech bubble.


Household equity percentage vs. S&P 500 total return

The following chart takes some explaining.

It shows the percentage of household financial assets invested in stocks (blue line) versus the S&P 500 total return for the following 10 years (dotted line).

Notice that the right axis is inverted and the dotted line tracks pretty close to the solid blue one. The correlation is 0.91, which is extraordinarily high.

What the chart shows us is that a higher percentage of household assets in equities points to a lower annualized return over the next 10 years.

Note the green arrow at the 2009 low. It points off to the right scale just below 15. That suggests that someone who bought stocks at that low point and holds them until 2019 will realize a roughly 15% annualized return.

That’s the good news. The bad news is that the red arrow at 6-30-2016 means that the 10 years ending 6-30-2026 should produce a 3.25% annual gain. That’s not awful, of course, but it is nowhere near the 7% or more that many pensions and insurance companies think they can earn on their portfolios.

We are way overdue for a correction

Bottom line: We are way overdue for a correction. Again, our situation is not the worst it’s ever been, but we are beginning to bump up against historical lines in the sand.

Here’s the chart, which shows the number of days before the start of 5%, 10%, and 20% corrections.

Here is how you read this chart:

The top section shows the history of the S&P 500 Index from 1928 to present. The next three sections show the number of days prior to the start of 5%, 10%, and 20% corrections.

I think we are still in a very long-term secular bear, although there has been a clear cyclical bull market since 2009. I think the next global recession (hopefully not a depression) will potentially give us a vicious bear market that will mark the end of this secular bear.

You can see that it has been 116 days since we had a 5% correction. Since 1928, the average number of days before a 5% correction occurred was 50. In secular bull periods, the average number of days was 84. In secular bear periods, the average number of days was 31.

Note that we have been 210 days without a 10% correction. Since 1928, the average number of days before a 10% correction occurred was 167. In secular bull periods, the average number of days was 331, while in secular bear periods, the average number of days was 91.

It has been 1955 days since we suffered a 20% correction. Since 1928, the average number of days before a 20% correction occurred was 635. In secular bull periods, the average number of days was 1105. In secular bear periods, the average number of days was 486.

The current case of 1955 days without a 20% correction is more than three times the average of 635 days (for the whole period from 1-3-1928 to 12-8-2016).

For this record number of days, let us all join hands and exclaim, “Thank you, Fed, BOJ, and ECB!”

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CPL's picture

Dow 1000000! Bullish!

Jtrillian's picture

DOW 20000000000!

To hyperinflation and beyond!!!

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) This Might Hurt Dec 23, 2016 9:11 PM

"That will lead to an eventual global crisis of biblical proportions"

Damn.  I hate those swarms of locusts.



(of Biblical proporations.)

Cynicles's picture

 "That will lead to an eventual global crisis of biblical proportions."

That will lead to an eventual globalist assimilation of the world.

Stanelli's picture

Hate to break it to you but we already have it (the locust) in Europe and from what I read, you have it in America as well.

scottch's picture

Brought to us by the globalists

CPL's picture

It's built to do nothing else but create inflation and one day it won't even require a central bank to print the money, the interest rate alone will do that job for them.

LetThemEatRand's picture

Historical charts mean jack shit when the Fed and other CB's have pumped literally trillions into the hands of the oligarchs and bankers over the last few years.   I think the world could be taken over my zombies and the S&P would react by staying range-bound.

Urban Redneck's picture

What's ironic about that is that if CBs pumped a much smaller amount of money into the real economy instead of into the oligarchs' fictitious net worth, there would be inflation that even the BLS couldn't deny, but much of the argument in those charts could be negated.  What's not so funny is that you take the FRB at its word, that's exactly what they've been trying to do these many years...

Forget the chicken and egg, which came first- the FRB liar or the FRB idiot?

LetThemEatRand's picture

If the CBs pumped money into the real economy it would defeat their goal of world domination via neo-feudalism.

Lizardking's picture

Exactly, If the market continues to rally like it did in Nov/Dec then I would agree that a bubble pop is likely two years from now. If we slowly grind higher from here then I expect the real noticeable correction to occur 5-8 years from now. But it's chartists and fact seekers that will be the first to capitulate as money continues to pour into market. Don't forget the age old rule, the market can remain irrational longer than you can remain solvent.

rccalhoun's picture

historical charts mean nothing.  we are in an engineered 'bull' market.  a lot more engineering to come...right before the big bang


SoDamnMad's picture

Banks are going to crash the market soon to tell Trump who is the BOSS

38BWD22's picture



The ten thousand things rise and fall without cease.

-- Lao Tse, approx. 500 BC

Some things never change.


LetThemEatRand's picture

Great reference and made me look it up.  He also said "Retire when the work is done.  This is the way of heaven."  Something to think about relative to your comment on the other thread....

Cynicles's picture

"Some things never change."

"The channel may change, but the story is always the same"


Bryan's picture

Wake me up when just one of these predictions of armageddon are actually right.

Wow72's picture

You can be wrong a 1000 times, but the one time your right on this EVERYONE IS FUCKED!

Historically its inevitable that  someone gets this right once.  I have too much faith in probability to ignore probability.

Wow72's picture

You can do good on 1000 to 1 odds.  Doesnt have to happen much as long as u catch it.  Merry Christmas.

blargg's picture

That's how insurance works. It's worty paying for something you expect to never use. And it's worth offering insurance at a fraction of the cost of payout. Paying some money to have things I can hold in my hands that will be invaluable during a collapse is worth it, even if they are never needed (all the better).

Irvingm's picture

Zero hedge is the home of the bears. That is why so many on here have gone broke. When the trend does change, they will have no money left to profit from it. lol

Wow72's picture

and to this the FED says "Mission Accomplished" Job well done. Nothings natural anymore and this helps, it helps put one side under and keep the whole thing out of balance and then POP goes the weasels, help? healthy? OK?  8 yrs in?

I love the ole coyote because thats exactly where we've been for awhile.

again Merry Christmas. 

P Christmas Carole's picture

This is an excellent article and brings out some probably truthful points. Howver there is one big part of the puzzle missing CREDIT DEBT.


Without getting into that subject let's admit that yes, while we are overdue for a correction that until the correction comes, it is not here.


Investors have lost a lot of money over the past several years by too many so-called analysts predicting DOOM!  We should not be blind to these factors but the analyst who is consistently correct in their predictions is the one that should be listened to. 

There are others on this message board who have mentioned ShepWave.com  They have the ONLY track record that proves they call rallies as well as sell offs.


Below I have posted what they said in their blog. ALso here is a link that PROVES that they do call the directional turn WHEN IT HAPPENS, OR BEFORE!! 




FB post…showing QQQ chart from Dec 2nd



WE need more analysts like this. 

P Christmas Carole's picture

From their blog, www.shepwave.com/blogs:


ShepWave TWO IMPORTANT Updates for Monday Published. YOU JUST CAN'T MAKE THIS STUFF UP!
by ShepWave.com
Posted: 12/23/2016 17:40 EST

Again, You Just Can't Make This Stuff Up!


This past week has been an easy week of trading. In fact we have not seen any real surprises in the indexes in quite some time. The indexes were range bound this past week as anticipated; and we see a set-up for a possible favorite chart pattern working out this next week.


Two Updates have been published for next week:


One is a Special Update for Monday which shows the weekly time frame analysis for the US equity indexes as well as crude oil and gold.


The second is the Regular Update for Monday containing the daily time frame analysis for the US equity indexes as well as crude oil, gold, and the VIX.


In these updates you will find specific chart patterns along with trigger areas and target areas. The analysis is thorough and it is important for traders and investors of any time frame to keep in mind what the longer term technicals are indicating.


Tuesday's Pre-Market / Intra Day Update will be published by Monday evening at the latest.


Get some rest and enjoy your holiday weekend; but be ready to come back Tuesday to some market activity such as we have not seen in a while. 

Irvingm's picture

Okay first of all. Tyler does present some truthful and pertinent information.


But you are right the analysts at shepwave who used to work at Goldman are good and their specific type of analysis catches up and down trends before they happen. Their chart history proves this fact. They show 3 years or more of past reports.


But, Shepwave is also a secular bearish group of analysts.  The difference is that they have not made the mistake of ignoring the technical factors indicating the trends and pivot points. So their group has not gone broke chasing the beairsh view.


And yes, we all know that this country is due for a major correction. It will happen when it happens and not until then. In the meantime just trade the trends as SW indicates. 

StevieTexie's picture

Good stuff. The S  Wave people have been doing a phenomenal job. 

AliSONY's picture

Thanks I shared this. 

KayaCreate's picture

Diversify and stay employed. We will get thru this fine.

Neighbour's picture

Secular=denoting attitudes, activities, or other things that have no religious or spiritual basis.

"secular buildings"

synonyms: nonreligiousareligiouslaytemporalworldlyearthlyprofane
formallaic "secular music" Let's see were this will lead us in our forgoten history...who will save the day, or will we be saved out of this calamity?
TradingTroll's picture

The PE chart shows higher highs. That means the next higher high will put the sitcom PE high to shame.

First dibs on Dow 40000 hats!

Between Two Hedges's picture

How much does the trade deficit with china put negative presssure on inflation?

StreetObserver's picture

Whatever bad happens, the MSM, and the fossilized Clinturds will blame it on Trump, even though the seeds of this financial disaster were first sown back in the Reagan and Clinton years.

Push the meme that we are heading into a depression and it's not Trump's fault. All we can do is save our consumer spending for his administration starting in February.

scoutshonor's picture

I heard enough stories about the last depression from my parents and grand parents that I will save as many of my purchases  as possible for the Feb after the depression is over.

Nothing against Trump--it's just that buy low thing.  I'm fairly certain they will have plenty of room to the downside way past Feb.

monad's picture

The bubbles were engineered exactly. If you can't do this your approach isn't right for you.

amadeus39's picture

Pessimists accomplish nothing! Why bother. Whiners not winners. This website should be called Waiting for Armagedon. I'd be out of here for good if I didn't enjoy the humor so much. If I were a standup comic, ZH would be a must read.


wholy1's picture

LOL - "Long-Term Secular Bear . . .".  I still maintain this is the "GreatER Depression" beginning 2008-09 cuz . . .  it's a P-R-O-C-E-S-S. All the REAL stats say so!  100+/- million "employable" can't find OR gave up seeking "gainful" employment.  Not too mention all the absolutely horrible REAL GDP and debt stats.  DUH