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The 21st Century Bear Market

The 21st Century Bear Market

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The paper authored by Chief Investment Officer David Ross analyzes and explores cyclic and secular bear markets using P/E, inflation and other factors with a primary emphasis on causal factors that may play important roles in the progress and end of the current bear market. The paper demonstrates that the U.S. stock market is in a protracted bear market that started in 2000 and is likely to continue for several more years.
The paper authored by Chief Investment Officer David Ross analyzes and explores cyclic and secular bear markets using P/E, inflation and other factors with a primary emphasis on causal factors that may play important roles in the progress and end of the current bear market. The paper demonstrates that the U.S. stock market is in a protracted bear market that started in 2000 and is likely to continue for several more years.

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Published by: Radiant Asset Managment on Nov 06, 2011
Copyright:Attribution Non-commercial

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06/06/2013

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Chart 19 shows the up-trend in PE ratios across time, corresponding to the falling risk of owning stocks.
The black line is the trend line while the green and red lines are one standard deviation above and
below the trend line. It is remarkable how often local peaks in the PE Ratio are near the green line and
local troughs near the red. The red line today is at about 14 and will remain below 15 for the rest of this
decade. This provides the first rough guess that the ending PE Ratio of this market will be between 14
and 15, with an average of 14.449

. Chart 20 shows the S&P price range at that PE. The result is

considerably less distressing than the previous one.

Chart 20: S&P with PE = 14.4

Chart 20 would require a drop between 14% (2020) and 38% (immediately). While still substantial,
either would be less alarming and more believable than the previous values.

Chart 21 shows another way to look at the PE Ratio across multiple bear markets. It eliminates the
starting PE Ratio by normalizing the PE Ratio throughout the bear market by its value at the start. In
Chart 21 the 19th

century bear market should be ignored because it started prior to the earliest data and
hence is incorrectly normalized. The next three bear markets are shown in their entirety and the final
one is shown to date.

49

Further caution is advised since two of the PE minima that ended bear markets occur well below the red line
(1921 and 1982), one near it (1942) and one well above it (1877).

Source: http://www.econ.yale.edu/~shiller/data.htm

Ending S&P Price

Shiller PE Ratio

Bear Market End

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