Stock performance has been weak for the past 15 years. If history is any guide, the performance is likely to stay poor for at least another 10 years.
This will be so because stocks are still amazingly expensive relative to most of recorded history, says Henry Blodget of Business Insider.
In the past, when stocks have been this expensive — or close to this expensive — performance over the next decade has been crappy.
According to the long-term valuation analysis, we are still living the aftermath of the highest level of stock-market valuation in history — the peak of the tech bubble in 2000 — and that this will take at least another 5-10 years. That's the bottom line.
Bulls vs bears
Throughout the past 100 years, the market has gone through distinct "bull" and "bear" phases lasting 10-25 years each, on average:
A 29-year bull market from 1900-1929
A ~20-year bear market from 1930-1950
A ~15-year bull market from 1951-1966
A ~15 year bear market from 1967-1982
An ~18 year bull market from 1982-2000
A ~? year bear market from 2000-?
Some analysts suggest the latest "bear" phase ended in 2009. They also think we're in the middle of a glorious "bull" phase again.
However, based on valuation — stock prices relative to the fundamentals of the underlying firms — we unfortunately appear to still be in the middle of the latest "bear" phase.
Stock prices usually surround the "fundamentals" of the underlying companies — i.e. earnings. Particularly, stocks have traded in a range of 5X cyclically adjusted earnings (at bear-market lows) to 44X earnings (at the peak of the biggest bull market in history — the one that ended in 2000). Meanwhile, the "average" P/E ratio over this period has been about 15X.
In the chart above you quickly notice a pattern:
Sustained bear-market periods have begun when the P/E is very high (~25X+).
Sustained bull-market periods, meanwhile, have begun when the P/E is very low (5X to 9X).
To put it another way, sustained bull markets emerge when investors are fed up with stocks — and so pessimistic about the future of stocks — that they'll pay only 5X to 9X earnings for them, says Blodget.
And sustained bear markets start when investors are so excited about stocks and the prospects for stocks that they'll happily pay 25X earnings or more for them.
Credit: mql5.com
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