The US Stock Market Looks Like It Did Before Most of The Previous 13 Bear Markets

The comments above & below is an edited and abridged synopsis of an article by Robert Shiller

The US stock market today is characterized by an unusual combination of high valuations, following a period of strong earnings growth, and low volatility.

What do these conflicting messages imply about the likelihood that the US is headed toward a bear market in stocks?

To answer that question, we must look to past bear markets. And that requires the definition of what a bear market is. The media says a traditional bear market has a 20% decline in stock prices.

That definition does not appear prior to the 1990s. It may be rooted in the experience of October 19, 1987, when the stock market dropped by just over 20% in a single day. Attempts to tie the term to the Black Monday story may have resulted in the 20% definition.

Shiller discusses the origin of the 20% figure; the CAPE ratio; earnings to the rescue; and low volatility.

Today’s stock market looks a lot like it did at the peaks before most of America’s 13 previous bear markets. If a bear market does arrive, for anyone who does not buy at the market’s peak and sell at the trough, losses tend to be less than 20%. Shiller’s analysis is a warning against complacency. Investors who allow faulty impressions of history to lead them to assume too much stock-market risk today may be inviting considerable losses.