1. NEW: Recessions By Decade: Record on the Horizon. The current expansion, which started in June 2009, is now the third longest in recorded history since the 1850s. If it lasts until May 2018, the current expansion will become the second longest and then in July 2019, it will become number one. But most of all, if the current expansion endures to January 2020, then it will mark the first decade (the 2010s) without a recession.
Many people don't realize that recessions are relatively common and frequent. Before 1930, recessions occurred equally 1 to 4 times per decade. After 1930, recessions occur once per decade about a third of the time and twice per decade about two-thirds of the time. If history is a guide, we should expect 1 to 2 recessions each decade.
The current long expansion has come at great cost. Had this expansion simply grown at the historically-average rate, the economy, standards of living, and average worker incomes would be more than 20% higher than they are today. No wonder we have a current environment of economic frustration.
2. Consistently Underperforming: The record is consistent; Standard and Poor's for the past five years presents a composite forecast from analysts that is often revised downward over the subsequent two years in the forecast horizon. Their 2016 forecast was initially $124 per share and now is nearly finalized at less than $95. 2015: $148>$87; 2014: $120>$102; 2013: $108>$100; and 2012: $93>$87. And almost every year's forecast peaked higher than the initial forecast... Regardless, profit margins at forecasted levels are well-above historical levels; expect a reversion on the horizon.
3. In the first quarter the stock market surged 5.5%, well more than underlying economic growth. As a result, normalized P/E increased to 29.4—significantly above the level justified by low inflation and low interest rates. The current status remains “significantly overvalued.”
4. The update to the current secular bear chart reflects a cumulative 216% cyclical bull surge. Visually, the market appears to have built a base over the past few quarters and is using that base as a launching pad. Don't be deceived. The stock market requires financial principles to sustain gains. Technical bases are helpful when there’s room for the principles to propel the market.
5. Stock market volatility plunged in the first quarter to the lowest 4% of periods since 1950. High or rising volatility often corresponds to declining markets; low or falling volatility is associated with good markets. The current period of ultra-low volatility is a reflection of a good market, not a predictor of good markets in the future.
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Earnings Trends: History & Future
This graph presents both (1) the historical trend for actual reported earnings per share (EPS), including a forecast by Standard & Poor's, and (2) an inset graph presenting the historical record for S&P's forecast over the past five years. To put the historical trend and future forecast into perspective, the graph includes Crestmont's assessment of the long-term baseline trend for EPS. Crestmont's baseline also puts into perspective whether current and forecast EPS are above or below the long-term trend for EPS. Note: the inset graph reflects S&P's EPS forecasts for recent years; forecasts begin about two years in advance and proceed until the year is finalized.
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The P/E Report
There are numerous versions of the price/earnings ratio (“P/E”), yet there are very few of them that can be appropriately compared to the recognized long-term average of 15. The objectives of this report are to detail the current level of the P/E ratio, to answer frequent questions about it, and to address the status of the current stock market cycle.
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This Secular Bear...So Far
This secular bear began in 2000 and has lasted well more than a decade. The surges and falls are relatively consistent in both magnitude and duration to past secular bear market cycles. With valuation levels still relatively high, as measured by normalized P/E, this secular bear has quite a way to go.
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Stock Market Volatility: An Erratic Cycle
This graph reflects a measure of stock market volatility--the statistical standard deviation of monthly changes for the S&P 500 Index. The line on the graph reflects volatility for each trailing twelve-month period starting in January 1951 and continuing with each month to present. There are several insights from the graph. First, volatility is volatile; it cycles erratically over time. Second, periods of extremely high or low volatility often follow the other. Third, volatility tends to spend most of its time around the average (i.e., within 25% above or below the average).
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Recessions By Decade: Record on the Horizon
The current expansion, which started in June 2009, is now the third longest in recorded history since the 1850s. If it lasts until May 2018, the current expansion will become the second longest and then in July 2019, it will become number one. But most of all, if the current expansion endures to January 2020, then it will mark the first decade (the 2010s) without a recession.
Most people don't realize that recessions are relatively common and frequent. Before 1930, recessions occurred equally 1 to 4 times per decade. After 1930, recessions occur once per decade about a third of the time and twice per decade about two-thirds of the time. If history is a guide, we should expect 1 to 2 recessions each decade.
The current long expansion has come at great cost. Had this expansion simply grown at the historically-average rate, the economy, standards of living, and average worker incomes would be more than 20% higher than they are today. No wonder we have a current environment of economic frustration.
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Please note that Crestmont Research maintains the same URL (i.e., the Internet address link) for subsequent updates. The benefit is that you can link to Crestmont's website and always have the latest update. The drawback is that a few computers may be slow to recognize that the file has changed. In those few cases, the computer will reload the last downloaded file from its cache (internal storage). If you don't see the updated version of a chart or article, please try clearing your cache or forcing a reload of the webpage or file.
Ed Easterling is the Founder and President of Crestmont Research. Mr. Easterling is the author of Probable Outcomes: Secular Stock Market Insights and the award-winningUnexpected Returns: Understanding Secular Stock Market Cycles. He is currently president of an investment management and research firm. In addition, he previously served as an adjunct professor and taught the course on alternative investments and hedge funds for MBA students at SMU in Dallas, Texas. Mr. Easterling publishes provocative research and graphical analyses on the financial markets at www.CrestmontResearch.com.
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