"I was intrigued by comments in Friday's markets review that you did not now expect further significant market falls like 2000-2003 and 2007-2009 for a long time. Looking at a history of equity bear markets it seems to me that previously each ended with a climatic sell-off where valuations became as extremely low as they had been extremely high previously. It seems to me that this failed to happen in either 2003 or 2009. Therefore I have still been expecting this 'third leg' of the bear market to appear at some stage before we can truly say that we are into the beginnings of the next bull phase. Has QE changed the course of normal market history by omitting this phase of the market?"

David Fuller's view

Thanks for an email of general interest.

I have actually been writing and saying this since 2009, sometimes asking the question: Do two severe bear markets within a decade make it more or less likely that another one will occur anytime soon? The link in the previous sentence takes you back to Tuesday 13th April 2010. Four paragraphs lower in that copy I also mention: "Fullermoney thinks the equivalent of 1974's stock market trough for US equities during the last valuation contraction actually occurred in 2009."


Every significant bear market lowers valuations considerably, not least in terms of book value. However, difficult economic conditions can distort the picture for a while by lowering earnings and prompting dividend cuts. In 2000, fashionable "new economy" stocks crashed from bubble-highs, including infinity PERs because some of those companies had yet to make a profit. "Old economy" stocks became even cheaper in that bear market. In 2008 banks were among the main casualties and valuations collapsed due to leverage and reckless loans. Broader market valuations in late 2008 and early 2009 were significantly lower.

Regarding the question on QE above, it has certainly pushed Wall Street higher, and is still doing so. However, I think the more conventional monetary stimulus that we have seen after every other big bear market would have prevented Wall Street's 2009 lows from being taken out in the subsequent years that have elapsed. I would be very surprised if the 2009 lows for US stock market indices are broken in the next few years, or at any other date in the future. However, I have repeatedly said that I expect a very choppy market environment over the lengthy medium term. That favours a sell high buy low strategy for active investors.