Barry Ritholtz’s Secular Bear Market

Barry Ritholtz, the CEO and Director of Equity Research at Fusion IQ, has argued several times in the past that we are in a secular bear market that started in March 2000. In a recent post, he wrote that “we are beginning the 14th year of the Secular Bear market that began in March 2000”.  Here I am not going to debate whether we are in a secular bull or bear market because this is totally irrelevant to short-term traders like me. Instead, I will present data that support the argument that the notion of secular bull or bear may depend on the method of calculation of returns.


The above yearly S&P 500 index chart since 1950 shows two different calculations of returns. The first is what I call the compound return, or total return, based on a $100 investment at the beginning of 1950 and shown in the middle pane. It may be seen that $100 has grown to $7,205. No inflation or dividend adjustments are included because the object of the analysis is to study actual price behavior and it is not concerned about purchasing power of money. It may be seen that since 1999, when the total return peaked, as marked by the horizontal line, the market has been unable to generate higher returns. 

The bottom pane shows the accumulated gains based on a constant $100 investment at the beginning of each year, again with no inflation or dividend adjustments.  Although returns are substantially lower when profits are not reinvested, the picture is nevertheless much different than that of the middle pane. The constant dollar investment return grew higher even during the period that is argued to be a secular bear market. Although this may sound counter-intuitive to some, it is mainly because of the huge drop of 2008 that total returns in the middle pane were significantly affected so that no break above the 1999 high could be made.

Obviously, in terms of actual magnitude the two returns cannot be compared but an argument can be made that those who took their profits and invested them in other assets away from the market were able to realize higher returns on a relative basis than those who reinvested the profits. Using simple scaling, the returns from the constant dollar investment could exceed those of the reinvestment method and while the profits of the former method are on the rise, those of the latter are still struggling with 1999 levels.

The effect of dividend payments can be analyzed with the use of SPY which started trading in 1993. First the case without dividends:


Also in this case, the constant dollar investment method has generated profits above the 1999 high and also the difference between the total return based on the reinvestment of profits is not that large because of the shorter time period. If dividends are included, both methods of calculating returns show gains above the 1999 high:


So what is the moral of this story? One possible explanation is that in terms of returns on invested capital, constant dollars invested at the beginning of each year may generate higher returns on investment (ROI) than when reinvesting profits, depending on market path. This is a tricky concept and it has to do with the notion of volatility. Large swings can have an adverse effect on compound returns as compared to simple arithmetic returns. Thus, for an investor who waits for 20 years while reinvesting everything the returns may stay at the same level for an extended period of time, as the charts illustrate, but for another investor who risks a constant amount of capital, properly scaled by some factor, the returns may keep rising . This analysis goes beyond the pointless argument as to whether this is a secular bear or bull market because at the end of the day for most of us the answer is not really important.  It is not important for the robots for sure.

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours.. 

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software.”) 


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