The market has made new highs recently, but the secular bear market that began in 2000 isn't over, according to Ed Easterling, president of Crestmont Holdings LLC, and a guru of long-term market cycles.
In a recent update to his popular research, he said that as of the end of March, the S&P 500 traded at a 22.4 price-earnings ratio using his 10-year normalized measure, a level that is fully valued given low inflation.
“The low to mid-20s is normal with low inflation,” Mr. Easterling said. “But what you can expect from here is normal to below-average returns ... We're pretty far away from a [new] secular bull — five to 10 years, at least.”
The 1990s bubble market became so far overvalued — reaching a normalized P/E of more than 40 — that it will take extra time to bring valuations back down to levels where a new bullish phase could start, Mr. Easterling said.
Secular bull markets usually begin with a normalized P/E of about 10 or less, he said.
“The market will probably chop around” from here, Mr. Easterling said.
“It doesn't have to go down 50%,” he said.
“The market can stay here another decade while earnings come up” and valuations move down, Mr. Easterling said.
Recent highs in the market recall 1972, when the Dow Jones Industrial Average made new highs almost a decade before a new bull market began, he said.
The big risk now, though, is getting into either an inflationary or deflationary period, which will drive valuations down by taking stock prices lower, Mr. Easterling said.
Whether this is a new bull market is just “semantics now,” said Doug Ramsey, chief investment officer of The Leuthold Group LLC, a research firm.
“We would argue we made the secular lows on stock prices ... on March 9, 2009,” said Mr. Ramsey, who also pointed to the 1970s for a historical lesson.
Although a secular bull market started in August 1982, the bear market lows were made in the fall of 1974, he said.
“And that's exactly what we saw in March 2009,” Mr. Ramsey said. “I think now we'll see a multiyear base-building period that could last another four or five years.”
