Secular bull & bear markets last an average of 17 years and the bear variety usually end with very low p/e ratios close to 10x average earnings over last 10 years.  The last secular bear market lasted from 1966 (Dow 969) to 1982 (Dow 784) with the 10-year average p/e ratio declining from 23x at the start to 8x at its end (source : crestmontresearch).

But secular bear markets do not necessarily end with the absolute price low in the indices.  This is a very important but subtle difference because the perma-bears will continually point out that the market’s p/e is not low enough for a new bull market to start and, by implication, this must be a bear market rally and indices will eventually fall back below their March 2009 lows.  However history shows us that investors can make money during secular bear markets in the period between the nominal price low of the indices and the ultimate valuation low point from which a new secular bull market commences.  Furthermore, there is no way of telling in advance whether the next secular bull market will start from a p/e of 12, 10, 8 or even whether it will be different this time (!).  So from a practical standpoint, long-term investors may be best served by staying invested in a diversified portfolio of quality stocks on low p/e ratios and banking some profits (top-slicing) every time the market nears an old high point in terms of the nominal price level of the index.  Each time the rally proves to be a false dawn and the market falls back to a support level, the long-term investor can re-invest the cash raised from their previous top-slicing exercise.  Eventually the market will sustain a break-out to new highs and a new secular bull market will be underway.

c.f. 1974 to 1982.  Dow went from a high of 1,067 in Jan 1973 to a low of 570 in Dec 1974.  The Dow rallied back to 1,000 in Feb 1976 but the market’s p/e ratio declined throughout the rest of the 1970s and reached a low around 8 times in 1982, when the Dow traded in a 784 to 887 range before the bull market really kicked off in August 1982.  So the market actually went up in terms of the nominal price level of the Dow but it got cheaper (derated) as corporate earnings rebounded during the 8 years from 1974 to 1982.  There was plenty of money to be made during this period as there were many Dow rallies and declines in the order of 10% to 20% during these years. 

The FTSE topped out at 6,950 in Dec 1999, hit a low of 3,278 in March 2003 and then more than doubled to 6754 in July 2007, and has since fallen to 3461 in March 2009.  There was plenty of money to be made in the rally of 2003 to 2007, even though it turned out to be a rally within a secular bear market which has so far lasted 10 years.

In the last month, stocks have, in general, rallied after the publication of Q1 earnings which suggests that the market had over-discounted poor earnings.  The bears argue that this cannot be a new bull market because the rally is being led by financials.  They may well have a point but just because financials have bounced back from extremely over-sold levels does not mean that the next market decline will take out the March 2009 lows. 

 So the answer is that the bear market may well be over in terms of the Dow not breaching its 6 March 2009 low of 6,470 but investors can expect the market to steadily derate in p/e terms over the next few years.  Hence we are now set for the market to find a trading range as earnings slowly recover over the coming years.