Last Friday, the Labor Department released the jobs report for August. Economists surveyed by Bloomberg had anticipated an addition of 130,000 jobs, but the actual figure was a disappointing 96,000.
This discrepancy highlights a few key points. Firstly, the economists’ predictions were off by 35 percent—quite a large margin. In many professions, such a substantial miscalculation would severely affect one’s job performance evaluation.
Additionally, this disappointing jobs report signifies that Wall Street’s hopes for increased quantitative easing will intensify. In an economy that seems backward, bad news often translates to good news for stock markets. This may provide Fed Chairman Ben Bernanke with the justification he needs to introduce a program of open-ended Treasury purchases.
At Economic Prism, we believe Bernanke currently finds himself in a precarious position. While he may be unorthodox in his approach, he is not devoid of common sense. How can he inject new money into the credit market when stocks are nearing all-time highs, oil is priced at $96 per barrel, and gold exceeds $1,700 an ounce? These factors clearly indicate that too much credit-based money is already inflating prices.
Historically, Bernanke has awaited signs of pricing instability before implementing previous quantitative easing measures. Nevertheless, despite our belief that he possesses sound judgment, it is still possible he could surprise us. We will find out more after the Federal Open Market Committee Meeting this Thursday.
The Secular Bear
Even if Bernanke announces QE3, it will likely turn into a classic ‘buy the rumor, sell the news’ scenario. The S&P 500 has surged nearly 12 percent since June 1, largely fueled by expectations of QE3, despite otherwise disappointing earnings. If Bernanke makes an announcement on Thursday, expect stocks to rise for a day or two before they inevitably retreat.
According to Albert Edwards of Societe Generale, stocks are facing a prolonged downturn:
“I believe that the third leg of the Ice Age de-rating in equity markets is imminent. For this secular bear market to end, investors must voluntarily give up hope. Otherwise, the vice-like grip of the bear will soon squeeze the hope from their gasping, broken bodies,” wrote Edwards in a note to investors.
Edwards is referring to the secular bear market in stocks that began in early 2000. The S&P 500 peaked at 1,527 on March 24, 2000, only to plummet by nearly 50% to 776 by October 9, 2007. After a brief recovery, the index reached a new nominal high of 1,565 before crashing 56% to 676 on March 9, 2009.
Historically, secular bear markets often trend sideways for five years or longer, and there is the potential for another 50% decline before the market regains its footing in a secular bull market.
The term “secular” in this context does not pertain to religion; it derives from the Latin word saeculum, meaning “era” or an extended period. Observing the S&P 500, we see it navigating through cycles of secular bull and bear markets. In a secular bull market, strong investor sentiment drives prices up with more buyers than sellers. Conversely, a secular bear market sees weak sentiment resulting in sustained selling pressure.
Within the Vice-like Grip of the Secular Bear
When examining historical price charts of the S&P 500, one can identify that secular market cycles typically last between 15 to 20 years. These cycles do not move in a perfectly linear fashion. A secular bull market may experience cyclical bear market periods, while a secular bear market can still see cyclical bull market rallies.
For instance, during the secular bull market from 1982 to 2000, the market encountered a cyclical bear market in 1987. Losses from that bear market were swiftly recovered, and the S&P 500 continued its upward trajectory for another 13 years.
Secular bear markets often do not exhibit nominal losses; instead, they might appear flat or trend sideways. However, in real inflation-adjusted terms, the loss of purchasing power can be severe. For example, during the 1966 to 1982 secular bear market, nominal losses were minimal, but inflation caused the dollar to lose 66 percent of its value.
Similarly, during the 2000 secular bear market, it momentarily appeared as though the market had regained its losses in 2007. Yet, adjusting for inflation revealed a decline in real returns, with the dollar losing 21 percent of its value during that timeframe. It’s crucial to recognize that real bear market losses can often be obscured by inflation, creating a façade of stability in nominal stock prices while real values decline significantly.
Currently, we can expect around six more years in this ongoing secular bear market. While we are keen to return to a time when we can confidently invest in an Index 500 fund and anticipate 10 percent annual growth, there is a prerequisite. As Edwards emphasized, “investors must voluntarily give up hope. Otherwise, the vice-like grip of the bear will soon squeeze the hope from their gasping, broken bodies.”
Clearly, the preferable method is to proactively relinquish hope rather than have it forcibly extracted during difficult times. Fortunately, those with foresight can use the recent rise in stock prices as an opportune exit strategy from the market.
Sincerely,
MN Gordon
for Economic Prism
Return from Within the Vice-like Grip of the Secular Bear to Economic Prism
