"A lot of Leave voters say "stop complaining, it's democracy!" Well, democracy doesn't always work. If five people democratically elect to take your iPhone, it's a mugging."
- Dane Baptiste

My great day

Allow me to rewind to the 13th July 1984. I turned 25 that day and had invited plenty of friends and family for a bash that same evening. At the end of the main course I began my carefully prepared speech:

“Thank you all for coming today to celebrate me, but there is much more to celebrate today than just me as, earlier today, I married Anne…”.

Deadly silence for a few seconds. Then the real bash began, and it didn’t finish for quite a few hours.

I tell this little tale for you to gain some insight into my behavioural pattern. I am not as plain vanilla as you may think I am, and neither is the investment strategy I pursue. When equities have performed outstandingly well for over 35 years (admittedly with a few hiccups along the way), and when investors are prepared to chase equities despite some very dark clouds gathering on the horizon, I know that the party is nearly over. Could the good times carry on for another year or two? They certainly could but, in the bigger scheme of things, a year more or less is nothing.

Secular bull and bear markets

December was a difficult month for equity investors – in fact the worst for US equities in nearly 90 years (Exhibit 1) – but there is more to the story than that. Equities go through both bull and bear markets, but they also go through secular bull and secular bear markets. I will argue today that we are on the cusp of a new secular bear market.

Cutting a long story short, it is possible – it is indeed quite normal – to have several bull and bear markets within a single secular bull or secular bear market. Since 1877, investors in US equities have been through six secular bull markets and five secular bear markets, the last one of which ended in March 2009 (Exhibit 2).

Exhibit 1: S&P 500 performance in the month of December
Exhibit 1: S&P 500 performance in the month of December
Source: Bloomberg

A secular bull market is characterised by rising P/E multiples, whereas P/E multiples always fall in secular bear markets, hence the massive difference in annual returns between the two, as you can see in Exhibit 2.

Exhibit 2: Secular US equity bull and bear markets since 1877
Exhibit 2: Secular US equity bull and bear markets since 1877
Source: The End of Indexing, Niels Jensen
Original Source: A Perspective on Secular Bull and Bear Markets, Jill Mislinski, Advisor Perspectives

Now, if you look at the total return attribution on US equities in 2018 (see Exhibit 3 below which was actually calculated in mid-December), you will see that P/E multiples on US equities have indeed been under significant pressure this past year.

Exhibit 3: S&P 500 total return attribution
Exhibit 3: S&P 500 total return attribution
Sources: Bloomberg, The Daily Shot