A couple key points:
- The bull market that started in the early 1980s began when P/E’s were in the low single-digits. The bull market from 1980-2000 was clearly supported by a P/E expansion.
- We are not in a secular bear market…but we may be in a secular sideways market with big ups and downs. Bear markets include both P/E and earnings declines. Our current situation is uniquely a secular P/E contraction that will reduce valuations to a point where investors are adequately compensated for equity risk.
- Volatility is the name of the game.
Grey Owl continues:
Two hundred years of US stock market history paints a remarkably consistent picture of (approximately) twenty-year bull markets followed by (approximately) twenty-year sideways or “range-bound” markets. We would contend that we are ten years into a sideways market.
Investment manager and author, Viataliy Katsenelson, describes range-bound markets this way, “range-bound markets are the bear markets of price-earnings (P/E) ratios (they decline), whereas bear markets are the bear markets of P/Es and earnings (they both decline). Range-bound markets are so-called payback markets – investors are paying back in declining P/Es for the excess returns of the preceding bull market.”
“Anyone who isn’t really confused doesn’t understand the situation.”
- Edward R. Murrow
Source: Grey Owl Capital Management
