Secular bear market could last into 2010, maybe through 2020
An emergent theory argues that the U.S. is in a "secular bear market," a long period in which equity markets experience flat or declining growth, punctuated by a series of bear market cycles. As the cycle progresses, each bear market cycle lasts longer and descends lower than the previous one, reaching lower and lower market bottoms and taking longer amounts of time to get there.
Historically, there have been three secular bears: the period between 1906 to 1921, the Great Depression period of 1929 to 1949, and the stagflation period of 1966 to 1982. If the current economic climate is, indeed, a fourth secular bear market cycle, the equity markets could experience many upward and downward moves over the next seven to ten years. At the end of the cycle, however, the overall movement of the markets will be negligible. Consequently, for investors who have already lost a considerable amount of money, the prospects for making their money back in the financial markets does not appear promising.
Most analysts say the current secular bear market began with 2000's "Tech Wreck" or "Dot-Com Bomb." The first of several market bubbles to burst in this first decade of the 21st century, it paved the way for subsequent housing and credit bubbles. Unfortunately, the recent recessionary pops probably won't signal the end of the bubble trend. "Secular bear markets come as a result of speculative bubbles, and you don't cleanse a speculative bubble with one bear market cycle," says Barry Ziskin, portfolio manager of Z-Seven Fund (ZSEVX), a global small cap fund.
Ziskin suggests that the bear market cycle that extended through 2002 (after the 911 terrorist attacks) and the current bear market cycle that began October 9, 2007 when the Dow closed at 14,164.53, may be the beginning of a series of bear markets that could take the markets lower than the Dow's March 9 nadir of 6,547.05.
"At the very least we should be looking at three years for this bear market . . . I'd be shocked if we reach the bottom before October of 2010," Ziskin predicted, adding, "and there is no guarantee that this cycle will be the final cleansing cycle before we get to the point where the market will truly recover."
David Rosenberg, chief economist at Gluskin Sheff & Associates shared similar sentiment last week on CNBC's Squawk Box. He stated that, "We're halfway through what I would consider a secular bear market in equities...we have a secular bear market and along the way we hit two price peaks, in 2000 and in 2007."
If the secular bear market started in 2000, "Halfway through" suggests that markets could be flat or trending lower until 2020, leading many investors to wonder how they can make money in this type of bear market environment.
Both Rosenberg and Ziskin say, in this environment, it doesn't make sense to be a buy and hold investor. "The person who adopts a buy and hold strategy in this type of market has their head handed to them," says Ziskin. Both analysts recommend a more active trading strategy, in which investors are willing to sell stocks and turn gains into cash during rallies that can then be used to buy stocks at bargain prices during market troughs. Although the overall trend will be downward, they both say investors should expect several bull market runs during the long-term bear market cycle.
Ziskin is also using a put options strategy, in which he is hedging his trades by buying put options that can cover his losses if the price of equities plunge. He currently has puts on the Russell 2000 small cap index and the Nasdaq 100 index.
"We've got a long, long way to go before this secular bear market is over," he says.