We Could Be Witnessing The Dawn Of A New Stock Market Super Cycle

fidelity market super cycles

Photo: Fidelity Investments

Despite its huge rally from its March 2009 low, the stock market has effectively gone sideways for the last decade.Many have characterised the current market as a secular bear market.

But in a new research report, Fidelity portfolio manager Jurrien Timmer writes that from a technical perspective, this secular bear may be turning into a secular bull.

Timmer examined how the S&P 500 has been performing since 1871 and discovered that on average, prolonged periods of below-average returns, or secular bear markets, last about 14.5 years on average.

By that measure, the secular bear market that we’re currently in is “getting a bit long in the tooth” now that it’s in its 13th year, and going by historical patterns, is likely to end.

But it’s no sure thing that we are entering a bullish super-cycle.  Many investors, especially pension funds that have lowered their risk profiles dramatically, aren’t really expecting the market to go into a secular bull market.

Nevertheless, Timmer thinks that the end of this bear market isn’t too far off.

“This study of market history seems to suggest that maybe the worst is over,” he writes. “If so, it will be important for investors to take a close look at their portfolios to make sure they are not too defensively positioned and that their investment mix is in line with their long-term goals.”

Timmer took a close look at each of the previous secular bull and bear markets.

BEAR: 1902-1921

'The first secular bear market lasted from 1902 to 1921, spanning a little more than 19 years. During that time, the nominal total return was 3.7% and the real return was --0.4%. The P/E fell from 14.8 to 14.0.'

Source: Fidelity Viewpoints

BULL: 1922-1927

'Then we got the relatively short-but-sweet secular bull market of the Roaring '20s. This period lasted only eight years, yet the S&P 500 gained 27.5% in nominal return and 27.8% in real return. The P/E ratio climbed from 14.0 to 20.2.'

Source: Fidelity Viewpoints

BEAR: 1929–1942

'The stock market bubble of the late 1920s (along with many other factors, of course) ushered in the Great Depression of the 1930s. That secular bear market lasted until 1942. During that time, the nominal return for the S&P 500 was --5.2% and the real return was --4.6%. The P/E ratio fell from 20.2 to 7.7. The hallmark of this period was, of course, a lack of demand and the resulting deflation. This is why the real return was not lower than the nominal return.'

Source: Fidelity Viewpoints

BULL: 1943-1967

'The next secular bull market lasted from 1942 to 1968, more than 26 years. This was when America was the envy of the entire world, when war-ravaged Europe and Japan needed America's products if they were to rebuild. During this time, the nominal return was +15.1% and the real return was +11.7%. The market's P/E expanded from 7.7 to 18.4.'

Source: Fidelity Viewpoints

BEAR: 1968–1982

'Then came the stagflationary 1970s and another secular bear market. From the small-cap bubble peak in 1968 to the double-dip recession low that resulted from Paul Volcker's inflation-fighting efforts, the S&P 500 returned +4.3% in nominal terms but --3.1% in real terms. The market's P/E fell from 18.4 to 7.7. This period was all about low growth and high inflation, and you can see that in the numbers.'

Source: Fidelity Viewpoints

BULL: 1983-1999

'We then got the disinflationary and multiple-expanding secular bull market of the 1980s and 1990s. During that 18-year period, the S&P 500 returned a whopping 19.1% in nominal terms and a still-whopping 15.4% in real terms. The market's P/E expanded from 7.7 to 28.6.'

Source: Fidelity Viewpoints

BEAR: From 2000 To Now

'It's been a secular bear market since a bubble extreme formed in 2000. Stocks have been languishing, with the S&P 500 returning only +1.4% in nominal terms and --1.0% in real terms. The P/E ratio has fallen from 28.6 to 15.8, but at the March 2009 low it briefly fell to 9.6.'

Source: Fidelity Viewpoints

After Twelve Years In A Secular Bear Market, It Looks Like The Market Is Turning


Another cyclical downturn is within the realm of possibility, and there are plenty of reasons why this might happen: the U.S. fiscal situation or the problems in Europe and China, according to Timmer.

But history tends to repeat itself, he said, and that 'from a technical perspective there is some reason for optimism that we are getting close to the end of this frustrating period of market history,' he said in the report.'

Source: Fidelity Viewpoints

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