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Bear, Interrupted


Approximately 35 years each separates the greatest bull market tops of the 20th Century: 1929, 1966, and 1999. Based on cyclically-adjusted price-earnings ratios, 1999 was the toppiest of them all.

It's no surprise that these tops were followed by the worst bear market bottoms of the past 100 years: 1933, 1975, and 2003.

But neither 1933 nor 1975 were the end of their respective bear markets. Adjusted for inflation, stock prices didn't surpass their 1929 high until 1956. The highs of 1966 were not seen again until 1996. It can take up to 30 years for stock prices to recover from a great bear.

So where does that leave us at the end of 2007? Still 20 years away from revisiting the highs of 1999?

Actually, 2003 might not have been the worst of it. Our version of 1975 may lie ahead of us in 2009.

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Although in some ways the recession of 2001 was mild, it caused the worst crash in nonfinancial corporate profits since the Great Depression. Stock prices also took their deepest 3-year dive since the Great Depression. Given that stock prices in 1999 were more highly valued than in 1929, it makes sense that profits and stock prices fell so far, so quickly.

But then profits recovered, so well that profits hit perhaps their highest level, relative to the economy, since World War One. And stock prices recovered, hitting new nominal highs during 2007. Stock prices today are more highly valued than during the great bull market top of 1966. It is as though the bear market never happened at all. The stock market is back inside another bubble, just one not quite as big as 1999 which makes this new bubble very hard for us to see without a great deal of historical perspective.

What interrupted this worst business recession since the Great Depression? What caused this biggest stock market bubble to reflate?

A combination of lifetime low interest rates and huge amounts of foreign savings led to an American consumer borrowing binge. Which encouraged a renewed American business borrowing binge. The typical decades-long bear market process was interrupted by an enormous stream of borrowed money, much of it originating overseas.

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Sometimes history can't tell you what will happen next. History repeats itself, yes, but not exactly, and some things are different from before. Based on 1929, our most recent stock market peak should've happened in 1997, but prices rose another 50% from there before they peaked in 1999.

Each stock market bubble takes a different path.

All we can say right now is that the current bear market probably isn't finished yet. We probably won't see stocks piercing their (inflation-adjusted) 1999 highs for another 20 years or longer. And we might see another deep slide in stock prices as the current bubble pops. Which means the road will feel mighty bumpy from here on. Foreign savings kept the party going for another round, but soon the bear market will resume its classic downward path.


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