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From Teeka Tiwari, editor, Mega Trends Investing: It’s the “price of admission” we pay to get good returns on our money…
Volatility—as disturbing as it can be—is a normal part of a secular bull market.
The last secular bull market in the United States ran from 1982 to 2000. The S&P 500 rose from about 100 to 1,500 over that time.
It was an enormous move higher… but even that bull run saw many scary hiccups:
- For 19 months, from June 1982 to January 1985, the market traded sideways.
- From August 1987 to October 1987, the stock market dropped 36% from its peak to its low. Twenty-four months later, we started breaking out into new highs.
- In July 1990, the S&P 500 dropped 20% in just three months. By February 1991, the market was again making new highs.
The Last Secular Bull Market: 1982-2000
These are normal patterns for secular bull markets. You get sharp, quick, sudden moves lower. Everybody panics and sells stocks at outrageous, low valuations.
Then you get a surge, bringing the stock market back up to new highs. Those who panic, lose.
The last time we saw a scary drop like the current one was in the latter half of 2011. Peak to valley, on an intraday basis, we dropped over 20%.
Again, people lost their minds…
At its 2011 low, the S&P 500 traded at a price-to-earnings ratio (P/E) of about 12.5. That’s “crazy” cheap. (The average broad market P/E since 1870 is about 16.7.)
As I write this, the S&P sits at 1,933. That means it trades at 16 times earnings. 2016 earnings estimates show the S&P 500 trading at 15.2 times earnings. These are both less than the 145-year 16.7 broad market average…
Does that look like an outrageously expensive stock market to you? Of course not…
When the S&P 500 starts trading at a P/E of 22-24—and it will, at some point—then we can worry about valuation. But for now, we want to be greedy.
Bottom line: Bull markets don’t end at low valuations. They end when valuations shoot through the roof. We’re nowhere close to this yet. So, endure the volatility. Follow our PBRG risk-management protocol—the Palm Beach Three-Legged Stool of Safety. And take temporary price weakness for the gift it is. Go long equities if you haven’t already.
There are still some terrific deals on outstanding companies out there. You can find a short list of buying opportunities in the Mega Trends Investing portfolio. We scour the markets for strong companies that are cheap, have an unassailable business “moat,” and are positioned to ride the largest investment mega trends to outsized gains. Click here to learn more about Mega Trends Investing.
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