2014 Secular, Ahem, Bear Market Update

Despite new market highs, evidence still suggests that the
post-2000 secular bear market is not over.
 

"For every action, there is an equal and opposite reaction."
- Newton’s Third Law of Motion

It is once again time for our annual status report on the post-2000 secular bear market. We have published many such updates since 2000 (informally in our Quarterly Client Letters since identifying the secular bear in 2001 and formally in this space for the last half decade). However, this is the first one published with several of the major stock averages currently trading above the previous secular bear market range -- thus, the sheepish title. So, is this the update when we finally declare the bear dead? For those hoping for the “all clear” sign, unfortunately the answer is no. While the extent of the new highs in the stock market is atypical for a secular bear market -- and not what we expected to see -- it is not necessarily a death-knell for the bear. In fact, the preponderance of evidence, per Sir Isaac, suggests the bear is merely hibernating.

So what makes the cautionary tone of this update more relevant than those over the past 18-24 months since the stock market has essentially gone straight up over that time, establishing new highs along the way? Paradoxically, perhaps it is because of the new highs, or the psychological impact to be precise. In this age of information and awareness, the concept of a secular bear market is not as foreign as it was during the 1970’s bear. While it was not even on investors’ radars when we first began warning of a new secular bear market in the early 2000’s, after two 50% corrections, it has become a part of the consciousness of the investment community, at least off-Wall Street. It is doubtful that most investors in 1973 had ever even seen a historical chart of the stock market. Today, every investor with a computer and an inkling of risk aversion has at least been made aware of such long periods of languishing returns.

Therefore, although the secular bear market view may not have become the consensus view, it certainly has become mainstream. Unsurprisingly, this has led to timid (though, not extremely so) behavior by investors. Since the market tends to inflict the most pain on the most people, perhaps the bear has been in hibernation the past few years because there just wasn’t enough money invested to do enough damage. That behavior has changed over the past 12 months concurrent with the new highs in the market. Money has flowed into stocks at a frenzied and historic pace (see our June 2013 Newsletter). Calls heralding the dawn of a new secular bull market have become commonplace and the secular bear market meme is now being dismissed. So while we are not suggesting that an all-time high in the stock market is bearish in and of itself, the return to non-consensus status is precisely why the risks associated with a secular bear may re-emerge at this time. In our October Newsletter, we indicated that the conditions which tended to characterize tops within secular bear markets were in place. Since our evidence here suggests the secular bear market has not ended, risk is exceedingly high right now.

Let’s look at the aforementioned evidence.

Click to read the rest of this month's Newsletter...
 

                                  
If the secular bear market is due to awaken out of hibernation, your 401(k) or retirement account would benefit greatly from risk management. My401kPro is designed to help you professionally manage your investment risk by 1) setting the appropriate investment exposure at a given time based on market risk and 2) identifying the best potential funds in your plan to invest in. Sign up now and receive a 6-month trial to My401kPro for just $49.99! Learn more or sign up at www.My401kPro.com