Long-term perspective
So far, we’ve been talking about the bull market that began in October 2022, which I also call a “cyclical” bull market, but I’m also looking at what I call a longer-term “secular trend,” or supercycle.
I believe that U.S. stocks have been in a super cycle of above-average returns since the 2008-2009 financial crisis. The above-average returns have been driven by several factors, including lower interest rates for much of that period, rising profit margins, and a decline in equity supply due to stock buybacks and M&A (mergers and acquisitions) activity. Stock buybacks in particular have been a strong driver of rising price-to-earnings ratios. Cumulatively since 2009, equity issuance has been about $2.7 trillion and equity reductions have been about $21.3 trillion. This is a large supply-demand imbalance relative to the U.S. market capitalization of about $44 trillion.
Of course, returns can only exceed the average until mean reversion sets in. Predicting when this will happen is complicated, but based on my model, I believe we are in the seventh of this secular bull market.
The current super cycle is very similar to the super cycles of past bull markets from 1949 to 1968 and 1982 to 2000. In terms of total price appreciation or total duration of the super cycle, it seems like there is still room to go up. But I think it is important to look at valuation as well. My favorite valuation metric is the 5-year price-to-total cash ratio (total cash including dividends and buybacks). Comparing the current period to past super cycle regimes, on a price-to-total cash basis, the current secular bull market does not seem to be over yet.
That being said, it is worth noting that valuations are historically high. While valuations are not useful for predicting short-term returns, they have historically been a good predictor of long-term returns. This is evidenced by the clear inverse correlation between price-to-total cash ratios over the past five years and the market’s compound annual growth rate over the following ten years.
To turn this historical relationship into a forecast (and understand when this secular bull market might fade), we created a regression model that uses the five-year price-to-total cash ratio as an input and produces an estimated compound annual growth rate over the next 10 years as an output.
