The End of Rising Share Prices

[Publisher’s note: What you’re seeing in the markets right now could be ‘the greatest bear trap in history about to spring shut.’ That’s the case Vern Gowdie makes in his new book, The End of Australia. Given what’s going on in the markets right now, you should elevate this book to the top of your reading list. You can read an online version by clicking here. Below is an excerpt from the book which, chillingly, hints at what may have already begun the last 48 hours…]

‘In the long term share markets always go up.’

Sound familiar? If something is repeated often enough and for long enough, then it becomes accepted as truth.

The investment industry has marketed this message so well that it’s rarely challenged. Every long term chart on the share market (with the exception of Japan) shows a wiggly line ascending from the bottom left to the top right.

Case closed? Not so fast.

Very few people actually study those ‘wiggles’ to understand the history lesson that lies within. ‘Long term’ means different things to different people. Statistically, in the long term your favourite sporting team should win a premiership. The question is, will you be alive to see it? Maybe. Maybe not.

In my opinion, long term is relative to your time horizon. If you are 60 years old, the share market making new highs in 30 years’ time is of little value to you. The more accurate portrayal of the share market’s wealth creation capacity is: ‘In the very long term share markets always go up, but this rise may not necessarily be in your investment lifetime.’

The All Ordinaries Index has been a stellar performer since 1983. In this 32-year period the Aussie market has risen from 500 points to around 5,700 points. But what about the next 32 years…will the All Ords repeat the compound performance of the past 32 years and go to 70,000? Perhaps a look at history may give us an insight.

The following chart shows that the All Ordinaries managed ‘only’ a four-fold increase (from 130 points to 500 points) over the 25-year period from 1958 to 1983.

Compared with 1982 to 2017, this was a much more subdued rate of return.


In 1968, the Australian share market ran headlong into a global secular bear market. From 1968 to 1983 (15 years) the All Ords went nowhere…zigging and zagging in a sideways pattern.

Very few people realise the All Ords had this extended breather before its stellar run of the past 32 years.

Click to enlarge

Is the market due for another breather?

In 2016, the stock market shrugged off bad news, uncertainty and massive political shocks.

Trump’s election, Brexit, Italy’s referendum, the Fed raising the cash rate — it kept marching into the record books.

In the short term, markets can leave you scratching your head.

When markets seem to go up in spite of bad news and uncertainty, many investors think about whether to increase their exposure to the seemingly unstoppable bull. That’s a natural reaction. People like to back winners.

My view on the US market is well documented… By any long-term valuation measurement, it’s expensive. Driving a market higher only makes it more expensive and, therefore, poses a greater risk to your capital. In my opinion, it’s an equation that offers very high risk, with very low return.

Perversely, the investing public sees the opposite. A rising market is an open invitation to participate in the promise of higher returns with minimal risk.

That’s hardly surprising. It is human nature to ‘go all in’ on an established uptrend before it reverses.

But is a reversal finally imminent?

To answer this question requires a look at the dynamics and influences of long term market trends.

Everyone has heard of bull and bear markets. Put the word ‘secular’ in front of them and more often than not people will give you a quizzical look…even those in the investment industry.

Secular markets are not very well understood. Secular markets are long periods (up to 20 years) when the market’s overall direction is either up, down or sideways.

Let me give you some examples.

From 1902 to 1920 the US market lost 1% in value over an 18 year period. During this 18 year secular bear market there were the shorter term bull (advancing) and bear (declining) markets we are familiar with.

However, the additions and subtractions from these annual movements culminated in a market that returned minus 1% over the entire 18 years…so much for ‘buy and hold’.

The period from 1920 to 1929 was a different story altogether for investors. The pluses far outweighed the minuses, leading to a 240% gain over the nine-year period. This was most definitely a secular bull market.

The secular pattern of long term advancement followed by extended periods of retracement is clearly evident when you view the markets with a wide angle lens.

Unfortunately most investors stand way too close to the action to appreciate these larger trends.

The other trend to consider when looking at secular bull and bear markets is the price to earnings (PE) ratio. Specifically, I look at the Shiller P/E Ratio.

The Shiller P/E (also known as CAPE 10), is described by website Guru Focus as:

‘Prof. Robert Shiller of Yale University invented the Schiller P/E to measure the market’s valuation. The Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles.’

Professor Shiller uses the past 10 years of earnings (adjusted for inflation) of the S&P 500 to reduce the peaks and troughs in the earnings data. This methodology is not perfect, however for patient long term investors it provides us with a trend on valuations.

During the 1902 to 1920 secular bear market, the market started with a P/E of 25x in 1902, and finishes in 1920 at 5x.

Then, during the secular bull market of 1920 to 1929, the P/E started at 5x and finished at 25x.

The pattern of P/E contraction and expansion is again evident when viewed with perspective.

The P/E (Price/Earning) ratio is the multiple investors are willing to pay for company earnings.

For example, company X can earn $1 billion, but what is company X worth? In 1920, an investor might look at those earnings and determine company X is valued at $5 billion (based on a P/E of 5x). However, nine years later, investors might look at these same earnings and decide the company is worth $25 billion — a 500% gain, without a dollar increase in earnings.

In reality the P/E ratio is like a barometer for social mood:

  • Pessimism = low P/E (The Great Depression)
  • Calm = average P/E
  • Exuberance = high P/E (the peak of the dotcom boom)

Secular markets are periods when society is either building up to a high or coming down from one. Changes in social mood and attitude don’t happen overnight. Hence the reason why secular markets take a decade or two to fully express themselves.

The important take-away from the history of secular markets is:

  • Secular bear markets start with a HIGH P/E and finish with a LOW P/E.
  • Secular bull markets start with a LOW P/E and finish with a HIGH P/E.

This rhythmic pattern has played out repeatedly over the course of the past 115 years. Unless it’s different this time, this pattern will happen again. This is why the greatest bear trap in market history is waiting to spring shut…


Vern Gowdie,
Editor, The Gowdie Letter

Vern is a contributing editor to Money Morning — Australia’s biggest circulation daily financial email. (To have Money Morning delivered straight to your inbox you can subscribe for free here).

Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia's Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top 5 financial planning firms in Australia.

Vern has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. In his leisure time Vern remains active with triathlons and pilates.

Money Morning Australia