The U.S. stock market may be in a bear phase, if so, how long might it last? How low might it go? (not far from here) What kind of recovery may be expected? (big double digit growth)

Bull phases last longer than bear phases. The last two bull phases gained over 100% over an average of 1307 days.  The last two bear phases (2001 and 2009) lost an average of 46% over 396 days.  They followed “bubble” periods in tech stocks and housing and where “cash was trash”– this is not the case today – the only “bubble” today is in bonds and cash is being hoarded in unprecedented amounts.  The bear phases were also occasioned by above average P/E multiples whereas today’s P/E multiple is significantly below average.  So far, the current market is down ~14% over the last 99 days.  It may not turn into a full-fledged bear market – which is my bet and why I refer to this as a “bear phase”.  A “bear market” is thought to be when the market is down 20%.  We aren’t down 20% but we have sentiment indicators that are near or equal the levels last reached at the bottoms of bear markets.  Bear phases are obviously followed by bull phases.  Once a recovery is considered underway, history suggests that the following 12 months will experience market growth of as much as 3X better than the average market growth of 8% since 1929.  Of course, things may be different this time around –eh?  The following chart contrasts the duration and percentage move of bull and bear markets since 1926.   Jeb Terry, Sr. Sept 26, 2011

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The 12 month forward P/E ratio for the S&P 500 is the lowest since 1987. It is 13% lower than the bottom in March 2009.

The forward 12 month (“FTM”) P/E ratio for the S&P 500 is the lowest since following the crash in October 1987.  Since 1982, the early days of the era of low inflation and declining interest rates, the market has been up 100% of the time 12 months after the FTM P/E ratio has been 10.5X or lower by an average of 11%.  Over the same period, if the FTM P/E ratio was less than 12.06X – the level reached at the March 2009, the bottom of the Great Recession bear market – the market has been up 94% of the time 12 months later by an average of 17.8%.  In order for the message from the current P/E ratio to be correct, earnings must either plunge 31% or the S&P 500 must gain over 40% in order for the P/E ratio to adjust to the median ratio since 1982Jeb Terry, Sr. Sept 25, 2011

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Household debt burden is easing, now lowest in 17 years, close to levels of the 80’s

Income has gone up, debt load has gone down . . . Household debt service as a percentage of disposable personal income is the lowest since 1994, also a period of economic recovery.  It is close to levels of the mid 80’s, yet again a period of economic recovery.  U.S. consumers have plenty of capacity to spend- they need to have enough confidence in the futureto spend.  There shouldn’t be any limitation on the spending for new smartphones and tablet computers this holiday season.  Holiday spending could easily exceed expectations.  Jeb Terry, Sr. Sept 24, 2011

 

Chart courtesy of Mark Perry at Carpe Diem

 Notice that savings deposits and money market funds are ~55% of DPI.  Recessions typically occur after cash has gone down and liabilities have gone up – unlike today.

Chart from Yardeni.com

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Consumer confidence headed for test of Great Recession lows. It was a positive contrarian signal then and is the same today

Despite growing (albeit slowly) employment, improving earnings, and a declining personal debt burden, consumer confidence is testing levels seen in at the depths of the Great Recession in 2008/2009.  The last time sentiment was this low in the spring of 2009 the economy was shedding jobs at the rate of 700,000 per month.  The economy added 331,000 jobs last month according to the household survey of the BLS.  The low sentiment is not supported by the facts. Hence, it is driven by non-core news flow and threats to consumer/investor wellbeing such as the ongoing political debate about deficits and increased taxes.  Low sentiment is not a precursor to recession.  It is a precursor to recovery.  Jeb Terry, Sr. Sept 24, 2011

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News flash: Jobs are actually increasing although you wouldn’t know it from consumer sentiment

The economy added 331,000 jobs last month according to the household survey of the BLS.  The same survey indicates 1.67 million new jobs have been added since the low point in December 2009.  While new jobs are being added, the economy is nowhere near full employment.  Recessions generally start from points of full employment, not like today.  Businesses don’t need to lay off workers when there is over 9% unemployment. Jeb Terry, Sr. Sept 24, 2011

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Households are still paying off debts, businesses are starting to borrow moderately, the US Treasury is slowing their rate of borrowing.

Total borrowing in the U.S. is dramatically slower than any year since the mid 80’s with the exception of the lows in 2008/2009.  Even with high levels of US Treasury borrowing, the total borrowing has slowed as households have liquidated debts and businesses have cut back.  Recessions since 1970 have not started when borrowing relative to GDP has been so low.  In fact total new borrowing – including Treasury borrowings – is only 5% of nominal GDP today compared with over 30% of GDP in 2007/2008 going into the last recession.  Jeb Terry, Sr. Sept 24, 2011

Source: Yardeni.com

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The tone of investor sentiment is signaling approach of a market bottom.

The following chart from Ed Yardeni shows that extremely bearish sentiment occurs at market bottoms – such as now.  Notice that the ratio of bulls to bears broke below 1 at the market bottoms in 2002, 2008/2009, 2010 and today.  At some point the fever breaks and investors come back into the market.    Jeb Terry, Sr. Sept 21,2011

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There doesn’t seem to be a slowdown in US exports if one looks at volume of outbound containers leaving the Port of L.A – one of our largest freight port.

There are increasing fears of another recession.  It is understandable in light of the slowdown evidenced in economic metrics from July and August.  One encouraging stat is the number of containers being shipped out of Los Angeles.  These tend to be manufactured goods.  The trend is up.  August shipments were challenging the record high set earlier this year.  Don’t be too quick to assume the U.S. will return to recession status.  Jeb Terry, Sr. Sept 21, 2011

Source: Mark Perry, Carpe Diem

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People spending more time on their mobile devices – more than they spend with newspapers and magazines

A recent presentation by Geoff Ramsey of eMarketer updated the time spent each day by US adults on the different types of media. Time spent on mobile devices and spent on the internet is going up.  Time spent on other types of media is going down.  I have noted this trend in the past.  It is a trend that will continue for as long as we can forecast.  It fundamentally changes the way marketing and advertising – in fact all commerce – is conducted.  Aberdeen is heavily involved in companies who are the winners in this trend.  Jeb Terry, Sr. Sept 21, 2011

 

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