BACK TO THE FUTURE From the "Roaring Twenties":
a Trip Through the Dirty Thirties to Beyond The Trump Bump
(Be in the market now: P/E is rising. Rotate out in 2032.)

A Secular Bull Market is a period like the Roaring 1920s, where people just buy whatever is in fashion. Price rises faster than The slope in %/yr of price, dividend growth (not yield) and earnings should be the same.

Net Asset (Book)
Value rises. Price to Earnings ratio P/E The inverse, E/P is %/yr and should be more than dividend payout.

That permits purchase of plant and equipment for future earnings.

climbs too fast
during Secular Bulls, and needs to be reduced.

A Secular Bear Market followed; the Crash of 29 happened fast and ruined the economy as The banks sat on money rather than lending it and M1,2 etc. shrank.

That meant cash was not available to buy things, and prices fell.

deflation set in
(due to Suppliers stopped investing in yet more things to buy.

Central banks need to stimulate both supply and demand at such times.

Central Bank policy).
The result was the Dirty 30s, the second period to the right.

16 Year Alternations: Note the second trace; gold is a safe haven Secular Bears are periods when fear of price drops causes price drops.

When gold price starts rising, Market Sentiment soon drives stocks down.

when P/E is high
and When the ratio tips down, Market Sentiment drives gold up.

A dropping orange trace usually means a strong P/E correction.

drops again
when people believe that P/E has corrected. A post-war Secular Bull market followed the Dirty Thirties and the ratio shown rose with the DOW. People buy gold Fear of inflation and fear of market correction.

Then greed enters and people buy gold to get rich.

when fearful
, which was yet to happen.

Another Bear Market (center) followed; the stagflation period, when gold prices and the dollar inflated and forced Central Banks to let economic activity and the stock market to both stagnate. Relief and the 90s boom came eventually.

During the third Bear Market, starting at Y2K to the right, gold rose (driving down the trace above) until the DOW had climbed above its previous two peaks. Then sentiment changed, gold price dived, and the present Secular Bull got underway around 2016.

Typically a Secular Bear includes two Black Swans, shattering the gentler volatility that charts exhibit during Secular Bulls. Three sideways trends appear above while P/E was corrected to fit prevailing interest rate policy of Central Banks.

Bottom Line for Summer 2021:

We are one-third through a Secular Bull, with continuing low interest rates. Two collapses are behind us; the Dot Com Bubble of 2001, and the Financial crisis of 2008. Looking at the chart of the DOW to the right, we have risen out of the resulting horizontal movement at the "Trump Bump" and interest rates remain low.

Not shown is the recovery from COVID-19, which is underway right now. Secular Bulls and Bears typically last sixteen years each, so we have about one decade to Buy and Hold, before rotating into defensive stocks around 2030. ETFs can more than double in that time.

The Voting and Weighing Machines: "The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company. The message is clear: What matters in the long run is a company's actual underlying business performance and not the investing public's fickle opinion about its prospects in the short run."
The Big Four forces in the market are:
  1. Inflation rates, which are driven by Mass Psychology, and which in turn drive Central Banks (like a dog chasing his tail).
  2. Interest rates, which are set by Central banks. High interest suppresses inflation but causes bonds to compete with stocks for buyers, driving down share prices.
  3. Money supply. which consists of M0, M1, etc. and shrinks, causing Deflation, when interest rates are high. Recently Quantitative Easing has been used to prevent that.
  4. Market sentiment (fear/greed) which can take us right back to inflation, as indicated above.

To the right is the DOW and an inflation-adjusted version. To the left is the Crash of 29, which happened fast and ruined the economy as deflation set in when the Central Banks mis-handled things. After 16 years each (four Presidential Cycles) of a Secular Bear and a Secular Bull market, things got heated up.

During the 1970s the expectation of higher future prices forced Central Bankers to reduce the money supply again to prevent inflation. Like the situation above, neither the market or the dog was able to stop the cycle, but this time Central Banks caused the economy to stagnate rather than collapsing.

Another Bear - Bull pair brings us to the year 2000, when interest rate expectations had dropped. By pushing down rates even further, the Central Bankers finally managed to navigate two major financial shocks while keeping consumer prices stable, and stock prices also averaged sideways albeit with really bad volatility.
During the 2000s there was quite a bit of inflation of the money supply due to low interest rates. However, Maket Sentiment was the opposite of the 1970s Stagflation period, and Consumer Prices did not inflate - instead, the excess dollars went into the stock market, driving down P/E to make up for very low bond returns.

Right now we are past the Secular Bear and Market Sentiment is not very worried about inflation. It seems reasonable to expect another decade of rising stock markets before turbulence sets in again. (In 2031 we should probably switch to bonds and even gold.)

Multiple Expansion and The Trump Bump:
The P/E "multiple" tends
to wander around 20 (in USA; Canada 15).
It expands during Secular Bulls and contracts during Secular Bears.

To the right the most recent 30 years are broken into '90s Secular Bull market, the Y2K crash (Dot Com and Housing Bubbles) and now the beginning of a new Secular Bull, interrupted by COVID.

Note that the blue Price line periodically rises above the orange Earnings line, indicating expansions. This will be detected by the (temporary) R.O.R. of the price chart exceeding the (more predictable) calculated growth of Earnings.

The 1990s ended with over-buying driving P/E up to about 30. The second image over-laps a bit and then the bubble bursts. The second image ends just at the 2016 election.

The third image over-laps again, before the "Trump Bump" due to sharp tax reduction that sent earnings up. The second half of the image shows four years of a new Secular Bull Market.

Below those images is the ratio of upper blue Price line divided by orange Earnings. At the left, the "Dot Com" bubble developed during the 90's and burst just after Y2K (first gray bar.) The collapse brought Earnings (and P/E) down sharply.

Market Sentiment also collapsed (beginning of top middle image) after which the P/E multiple continued to slide for a while. People stayed complacent, pumping their savings into housing instead of the Market (borrowing too much). As a result, P/E dropped well below 20 (note orange earnings shooting up before the middle gray band).

This housing bubble also burst; visible in the second gray bar at 2009. That led to a shift in Central Bank policy that remains to this day; Quantitative Easing was invented, along with very low interest rates. That led to a reset of Market Sentiment; people stopped fearing inflation and did not trigger it by hoarding things. Instead they pumped spare cash into stocks.
The Bull/Bear alternations typically last four Presidential terms each. Thus it is early in a Secular Bull market, having just finished the first four-year term, so it seems good to stay in stocks.

OOPS! The last two years have incurred the COVID-19 pandemic. The 19-year chart for the price of gold to the right is saying that Market Sentiment and inflation are again dominating the Big Four - almost like the previous peak at Y2K (middle of chart). During 2019 and 2020 (recent white bar and previous gray bar), COVID-19 has resulted in money-supply inflation. It is not clear how this will resolve itself when it is embedded in a Secular Bull market.

Canadian housing prices have driven up the CPI inflation rate to nearly twice the 2%.yr target, and state-side Trump policies have greatly increased the national debt. Thus it seems wise to invest defensively until there is a correction in CPI, and the S&P500 also makes a correction.

"Earnings Yield" vs P/E:
The inverse of P/E is %/yr, and
Graham's weighing machine
adjusts it to about double competing return from bonds.

To the right we can see the effect of interest rates on stock price in the 1970s (mid-chart). That means capital investment shrank, with bank rate around 5% and Earnings Yield around 10%/yr. The inverse of 10% is P/E of only Ten. The whole economy stagnated until the 1990s Secular Bull began, and purchasing power of the dollar dropped (bottom chart drops, top one stays flat).

However, after the Financial Crisis of 2009, Quantitative Easing has encouraged positive Market Sentiment. Thus capital investment continued while P/E was being reduced, and then stock prices started rising toward the end of the Secular Bear when US corporate taxes dropped. With bank rate under 2%, Earnings Yield also dropped to around 5%/yr. The inverse of 5% is P/E of Twenty.

That low rate also implies low dividend yield, since dividends ultimately come out of earnings. If we examine the Canadian ETFs above, their dividend yields are much higher and their price growth rates are very comparable to US stocks. However Canadian stocks are not well diversified - over-weight in financial and resource stocks.

BOTTOM LINE: P/E tends toward half the inverse of bank rate.


Reason for Choosing HAC:

This ETF does not pay a dividend (like ZLB just below it). The website mixes dividend yield and price growth together, which is good because that shows the true R.O.R. to an investor. The other side of the coin is that the three components of return get confusing:
Asset Growth: In the blue areas under the Stockcharts links (total R.O.R.), the first entry is the dividend "slope" which is growth rate of dividends paid out. The numbers may be picked out of Annual Reports etc. and plugged into the calculator above to indicate the rate at which a company is growing. Similarly, the Yahoo price charts give a slope that does NOT involve dividends; it approximates company growth too. That is the third entry in the blue areas.

Earnings Payout: Part of the company's earnings may be returned as cash rather than being re-invested to make assets grow. That is the second number in the blue areas, and therefore it should be added to asset growth to indicate what the owner is getting from a stock.

Comparing Indications: The simple calculator approach on StockCharts data adds the dividend yield to the Yahoo chart slope. It is probably the most realistic estimate because market slope reflects the judgement of investors while growth of dividends reflects the judgement of management.

Thus in the blue areas, one can compare that estimate to the sum of dividend yield and growth to see how well a company's management is balancing things. In the case of ETFs, that comparison applies to the group in the whole basket.

Average Inflation From DOW History:
The chart on the Left hand side shows 100 years of (unsteady) growth expressed in terms of the US dollar. The one on the right hand side shows the effect of some nasty inflation problems.

Inflation averages about 3%/yr, and Central Banks try to maintain a steady 2%/yr inflation rate. In the middle is a Stagflation period in the 1970s when they lost control and inflation rose strongly. Purchasing power of the dollar dropped while the DOW stayed relatively flat.