Ed Easterling of Crestmont Research boils down his views on long term markets to 12 rules of secular stock market cycles. In case you are unfamiliar with Ed’s work, several books, including Unexpected Returns: Understanding Secular Stock Market Cycles; he also wrote Probable Outcomes.
Here are Ed Easterling’s 12 Rules of Market Cycles:
1. Secular cycles are driven by the inflation rate (deflation, price stability, and higher inflation)
2. Secular bulls occur when P/E starts low and ends high over an extended period
3. Secular bears occur when P/E starts high and ends low over an extended period
4. Cyclical bulls and bears are interim periods of directional swings within secular periods
5. Cyclical cycles are driven by market psychology, illiquidity, or other generally temporary condition(s)
6. Time is irrelevant to the length of secular stock market cycles
7. Secular bulls require a doubling or tripling of P/E
8. Secular bears occur as P/E stalls and falls by one-third to two-thirds or more
9. When real economic growth is near 3%, there is a natural floor for P/E between 5 and 10, a natural ceiling around the mid-20s, and a typical average in the mid-teens
10. If economic growth shifts upward or downward for the foreseeable future, the natural range moves upward or downward, respectively
11. Inflation drives P/Es location within the range; economic growth drives the level of the range
12. The stock market is not consistently predictable over months, quarters, or periods of a few years; the stock market is, however, quite predictable over periods approaching a decade or longer based upon starting P/E
Good stuff. That’s an interesting take on broad cycles.