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Fourth is the secular position for equities. Recall that my charts comparing historical secular stocks bears reveal that at this point stocks are unlikely to see much lower in nominal terms again, and that we should be looking upwards to stocks, not down. We should see a rally in stocks here, which is also supported by presidential cycle seasonality, but which ends before the commodities final mania ends. There is an interesting situation with European equities, whereby they have reached their secular bear valuation buy signals at this point.

This table is from Goldman Sachs taken in mid-May, showing the cyclically-adjusted P/E ratios for key countries:


Source: Goldman Sachs

Historically, a secular bear ends when CAPE reaches below 10. You buy at that point and are rewarded for the next 10 years with an average return of around 15-20%. Furthermore, very good buy opportunities have arisen when FYPE (forward earnings valuation) exceeds CAPE. As you can see, Spanish and Italian stocks are well below 10 and the FYPE exceeds the CAPE too.

For reference, the lowest CAPE historically that we have ever seen was 3, reached by both Thailand and Korea. Guess what? Greece has now beaten that with a CAPE of sub 2. So, with some confidence we can say that buying Greek, Spanish and Italian equities at this point is likely to pay off handsomely over the next 10 years, but clearly the risk is for more downside before the upside eurupts.

Here is the chart again showing that the p/e for Germany is back at the last secular lows.


Source: SG

Here we can see the Eurostoxx index has made a third major low in this secular bear market. 3 major lows have defined historic secular bear markets, before a new secular bull erupts.


Source: Scott Grannis

Here is the UK cyclically-adjusted P/E. It is also back to where it was at the similar point in the last secular bear (around 1979). I note that it made its nominal low in the middle of the last secular bear, which looks a little different to the equivalent US chart which made its p/e low at the end.


Source: SG

Of course not all stock indices around the globe will peform the same. Not all stock indices will end this secular bear market with CAPE under 10. Here is Japan’s chart:



Source: Vector Grader

In the last secular bear, Japan’s ending CAPE was around 20. This may be accounted for by it being a leading index then, going on to its amazing peak in 1989.

Is the US the leading index now? Could we have bottomed with the US at CAPE 20 and European stocks in single digits? Well I think not yet, but we are getting close. I believe some other major indices need to drop beneath CAPE 10, not just the PIIGS, but we can see the likes of the UK and Brazil are close. I believe that more comprehensive drop beneath CAPE 10 will occur with a bear and recession following next year’s commodities finale. But the likes of Spain and Italy are so cheap now that I wonder whether they may now go on to outperform, and not look back. It’s either that, or they go on to join that club of the cheapest CAPEs ever. Clearly we need some more enduring and satisfying policy responses in Europe to enable them to rally sustainably, but at the same time once we have those in place, European stocks are likely to be much higher.

In summary, I think the message is clear that we are reaching towards the end of the secular stocks bear in terms of valuations. I don’t believe we need to see US stocks halve in order to reach under CAPE 10, as we can see from the range of ending CAPEs in the last secular bear. I expect that once we see the likes of Germany, Brazil and China under CAPE 10 we are done, and I expect that point to come next year or the year after, in a cyclical bear following a commodities mania conclusion linked to 2013's solar maximum.

Last modified: 2012-06-16 07:09:55 by highrev