It looks like we won't have to bear much more
20 Feb 2012 THE AGE - MATTHEW KIDMAN
Is the 12-year-old secular bear market on Wall Street officially over? IS THE 12-year-old secular bear market on Wall Street officially over? The US market, measured by the broad S&P 500 Index, has rallied 25 per cent since early October 2011 and has more than doubled since the crisis days of March 2009.By any measure these are impressive gains and investors who have picked the various lows have made truckloads of money. All at a time when the world is supposedly going through it's worst debt crisis in 80 years.To make an outright declaration that the bear market is over would be premature. However, there is a distinct possibility that by the end of this calendar year or early 2013 we may be in a position to farewell the bear that has hindered the globe for more than a decade and welcome the bull to rapturous applause.And here is the reason. All the major US stock indices are close to the levels they had reached in April 2011 when trepidation about sovereign debt in North America and Europe crippled investor sentiment.Most technical analysts of the sharemarket believe this level is a major resistance line and most markets are due for a breather, pull-back or whatever cliched term you would like to use for a brief decline in prices. Technical levels, like rules, are made to be broken.More significantly, the broadly based S&P 500 Index and the popular Dow Jones Industrial Index of 30 stocks are within 10 and 15 per cent of their all-time highs, hit in late 2007.In previous secular bear markets, such as in the 1930s and 1970s, when the major stock indices had breached the previous record high by any margin, they tended to go on with the upward surge for many years.This officially ended those secular bear markets on both occasions. In 1954 when the Dow Jones Industrial Index surged passed the 1929 high, the index kept rising for more than a decade. In 1982, when the Dow hits its highest point, it raced higher for five years.So, what chance of a secular bull market by close of trade 2012? Seasonally, the US market has a habit of making the bulk of its gains from October to April. The northern summers are renowned for anemic gains or losses.There are no persuasive reasons for this seasonality, except the numbers don't lie. Since last October the US market has followed the script almost perfectly. Therefore, we could expect the US market, after a thumping run, to take a breather in the middle section of the year.If the period from May to October registers a mild decline or flat performance, the S&P 500 and the Dow Jones Industrial indices will be set to make a genuine charge at a new record sometime between October 2012 and April 2013. This would officially end the secular bear market. Alternatively, if the indices fail to breach the old record in those positive months, then you know the bear is still in town.Doom merchants who pontificate endlessly about the problems of the world would be quick to discount the likelihood of the end of a secular bear market and the beginning of a secular bull market. After all, a conclusion to this secular bear market by year's end would make it the shortest and least painful in a hundred years.On the face of it this would seem a highly improbable scenario given the size of the bull market from 1982 to early 2000 and the record valuations, based on earnings, the market hit at the turn of the century.I have been in this camp and I'm struggling to come to terms with current events. That said, no secular bear market has had as ferocious an opponent as Federal Reserve chairman Ben Bernanke excepting, perhaps, his predecessor Alan Greenspan. Bernanke's bazooka is firmly aimed at the collective temple of US investors.The bears could well be right and the pall of European and US sovereign debt could eventually overcome investors who are enjoying the boat ride of a lifetime on a river of liquidity provided by Bernanke and his European counterparts. No one can or should pretend to tell you how markets will react to two such powerful forces. History, though, should provide clearer observations.What does this mean for Australia? The picture seems a little clearer on the domestic scene. The All Ordinaries Index is still a whopping 37 per cent from its November 1, 2007, high. There is no doubt that if the US sharemarket breaks into an official bull market later this year, that would boost equity markets around the world.Another comforting fact is that our two domestic secular bear markets in the 1970s and late 1980s took about five years before entering a sustainable recovery. In November this year we will hit that five-year mark.Hopefully, by then the Reserve Bank will have cut interest rates considerably on the back of a stalled economy and the Australian dollar will have sunk back to its historical average of about US75?. Both would prove major boons to local investor confidence.Matthew Kidman is a former fund manager, author and director of WAM Capital.