Sequoia issues warning of secular bear market (aka it is better to hold t-bills)
Today, Sequoia Capital hosted a mandatory CEO All-Hands Meeting on Sand Hill Road. There were about 100 CEOâ€™s in attendance and let me tell you, the mood was somber. Iâ€™m not one to perpetuate doom and gloom or bad news, but let me underscore this for you: We are in a serious economic downturn and this is just the beginning. Immediate, decisive and swift action is required, along with frugal, day-to-day management of expenses and our business is required.
A secular market trend is a long-term trend that usually lasts 5 to 25 years (but whose distribution is more or less bell shaped around 17 years, in the stock market), and consists of sequential 'primary' trends. In a secular bull market the 'primary' bear markets have in the past almost always been shorter and less punishing than the 'primary' bull markets were rewarding. Each bear market has rarely (if ever) wiped out the real (inflation adjusted) gains of the previous bull markets, and the succeeding bull markets have usually made up for the real losses of any previous bear markets. This is one of the reasons why a secular market trend may be said to encompass the primary trends within it. In a secular bear market, the 'primary' bull markets are sometimes shorter than the 'primary' bear markets and rarely compensate for the real losses of the 'primary' bear markets occuring during this extended cycle.
For example, in the 1966 - 82 secular bear market in stocks, there was hardly any nominal loss. But in real terms the loss was devastating. (In the past most 'housing recessions' were of a slow nature, thereby allowing inflation to keep housing prices steady.) Another example of a secular bear market was seen in gold during the period between January 1980 to June 1999. During this period the nominal gold price fell from a high of $850/oz ($30/g) to a low of $253/oz ($9/g), and became part of the Great Commodities Depression. The S&P 500 experienced a secular bull market over a similar time period (~1982 - 2000).
First, let's define our terms. From my perspective, a â€œsecular bear marketâ€ comprises a series of two, three or more individual â€œcyclicalâ€ bear markets (with cyclical bulls in-between), where in general, each successive bear market achieves a lower level of valuation at its trough. Over the period from peak valuations and trough valuations, it has invariably been true that stocks have lagged Treasury bill returns. .
This result is not particularly sensitive to the level of Treasury bills, but instead reflects the simple mathematics of total return. Holding the P/E multiple constant, the total return on stocks is equal to earnings growth plus the dividend yield. Since peak-to-peak earnings growth for the S&P 500 has historically been capped at only about 6% from cycle to cycle (as I've presented in numerous prior charts), it's hard to get significant long-term traction from one bull market peak to the next unless the second bull market reaches a higher P/E than the first one did. Worse, when each successive bear market registers a lower trough valuation, even rapid earnings growth is incapable of pulling total returns to satisfactory levels.
Secular bears in the past century include 1901-1917, 1929-1949, and 1964-1982. To illustrate, consider the 18-year period from 1964 to 1982. From a valuation standpoint, the S&P 500 reached about 20 times record earnings in 1964 and 1965. Even though stock prices continued erratically higher until 1972, a buyer of stocks at the rich valuations of the mid-1960's would have been only slightly ahead of Treasury bills by the 1972 peak.
prior â€œsecular bear marketsâ€ have generally provided a wide range of investment conditions and many good opportunities to accept market risk. Though investors who carelessly ignore valuations are sometimes forced to endure years of disappointing returns, it is also generally true that excellent investment opportunities develop well before the end of a secular bear. In the 1965-1982 period, for example, the brutality of the 72-74 plunge made the water safe for investors for several years at a time beginning in 1974 (even though stock returns didn't durably outperform T-bills until the 1982 trough was set
Though the 2000-2002 decline was similarly brutal, it unfortunately originated from truly psychotic valuations of about 34 times record earnings. As a result, the 2002 bear market trough occurred at the highest valuation (15 times record earnings) of any prior bear market trough in history, and failed to clear the excesses of the prior bubble. Predictably, the recent bull market has been far less robust than typical bulls
On its way down, the Dow Jones Industrial Average broke through another milestone, closing below 9000 for the first time since 2003, wiping out the bulk of the gains from the last bull market. The decline leaves America in one of its worst bear markets in decades, a slump that is triggering comparisons to long-running declines of the 1930s and 1970s.
Thursday's decline -- the 11th largest in percentage terms in the Dow's history -- put the stock market either in, or nearly in, a crash. A common definition of a crash is a 20% decline in a single day or several days. The Dow's crash in 1987 was 22.6% in one day. The 1929 crash was back-to-back declines of 12.8% and 11.7%