Will You Be Ready?
The stock market suffers significant declines when a good reason to sell develops, and being overvalued isn’t a good reason. High valuation does however leave the market vulnerable to a large decline when good reasons appear. History tells us it’s not a question of if, but when. This article discusses some of the reasons that are likely to become a reason to sell over the next 10 to 15 years.
The Schiller P/E Ratio is a measure of the stock market’s valuation. It is calculated by using the real earnings for the S&P 500 over the prior ten years divided by the S&P 500 index. As a rule of thumb, the stock market becomes expensive as the Schiller P/E Ratio moves above 20.0. Since 1875 Secular Bear Markets have developed after the Schiller Price / Earnings Ratio has exceeded 20.0. The Schiller P/E has only been above 20.0 eight times in the last 150 years. - 1903, 1929, 1937, 1966, 2000, 2007, 2021, 2026. The S&P 500 dropped by more than -30% after exceeding 20.0 in 1903, plunged during the Depression by -86.6% after the top in 1929, and declined -55.4% after the high in 1937. After the high in 1966 the S&P 500 entered a Secular Bear Market that didn’t end until August 1982, and included declines of -37.1%, -49.9%, and -27.6%. In 2000, the S&P 500 entered another Secular Bear Market which included declines of -50.0%, and -57.0% before it ended in 2009. As of January 2026, the Schiller Price / Earnings Ratio is 40.72. The precondition for another Secular Bear Market is in place.
Since 1875 generational buying opportunities and Secular Bull Markets have followed after the Schiller P/E has fallen below 10.0 – 1877, 1907, 1920, 1932, 1942, 1949, 1974,1982. In 2009 the Schiller P/E fell to 14.12. After the signal in 1907, the S&P 500 subsequently rallied 471.2% into 1919. After a low in 1921 the S&P rallied 379.0% before topping in 1929, jumped 334.2% before topping in 1937, and rallied 152.7% between 1942 and 1946. A generational low occurred in 1949 after which the S&P 500 soared 591.4% into a high in 1966. After the signal in 1974 the S&P 500 surged 47.2% into 1976. Another generational low developed in 1982 and was followed by a huge rally of 1404.2% after stocks became extremely over valued in 2000.
The Schiller P/E Ratio only fell to 14.12 in 2009. It is likely the combination of fiscal stimulus and aggressive monetary policy accommodation, including the introduction of Quantitative Easing in 2008, played a role in keeping stock prices from falling more. After bottoming in 2009 the S&P 500 zoomed 622.1% before topping in 2022. Extraordinary monetary policy accommodation was maintained long after the Financial Crisis. The Federal Reserve increased its balance sheet from $900 billion in 2008 to $4.5 trillion in 2015, and held the Federal Funds rate below 0.375% from December 2008 until May 2016. During the Pandemic the Federal Reserve expanded its balance sheet from $3.7 trillion in February 2020 to $8.9 trillion in March 2022.
The history of the Schiller P/E Ratio indicates that it has successfully informed investors when to become fully invested to profit from a big rally and a generational buying opportunity. When the Schiller P/E Ratio was above 20 it also warned investors that valuations were stretched and to be on guard and prepared, since large declines inevitably followed. In January 2026 the Schiller P/E Ratio is 40.72, so the risk of a Secular Bear Market is high.
Secular Bull and Bear Markets
There isn’t a defined length of time for how long Secular Bull and Bear Markets last since their length is dependent on the underlying fundamentals. If the economy is good and inflation is under control, monetary policy can remain supportive and corporate earnings will continue to increase. As the chart below illustrates a Secular Bull Market can last 15 to 20 years, especially if it begins when valuations are low. One indication that a Secular Bull Market is ongoing is when major market averages like the Dow Jones Industrial Average and the S&P 500 continue to make higher highs and higher lows. However, even during a Secular Bull Market, the stock market can experience sizable declines when a recession causes a Cyclical bear market. Although a cyclical bear market caused declines of more than 20%, the lows established are higher than the prior cyclical bear market. For instance, after the generational low in 1949 there were recessions in 1953, 1957, and 1960, but each decline during the Secular Bull Market bottomed higher than the previous low (review chart below).
Since 1901 there have been 4 Secular Bear Markets with each lasting a decade or longer. The length of each Secular Bear Market was determined by factors that impacted the economy (recessions), the amount of time needed to resolve significant problems (inflation, deflation), and the level of valuations. In a Secular Bear Market there is usually more than one problem or crisis’ occurring over time. The Secular Bear Market that started after valuations became stretched in 1903 was attended by a financial panic in 1907, the onset of World War 1 in 1914, and a global flu Pandemic that hit in 1918 after the war ended. The Secular Bear Market after the 1929 valuation high was accompanied by the Great Depression, deflation, and an Unemployment Rate of 25%. Although the stock market bottomed in 1932, the effects of the Great Depression and the beginning of World War II in 1939 persisted until 1942. Perversely, the increase in the production of military equipment sparked a lasting economic expansion.
The valuation peak in 1966 was followed by a Secular Bear Market that began after inflation took off and persisted until 1981. The Viet Nam War and OPEC contributed to inflation, causing the Federal Reserve to tighten monetary policy in 1969, 1973 and 1974, and in 1980 and 1981. The resignation of President Nixon due to Watergate led to an initial low in valuations in 1974. The Secular Bear Market that began in 2000 followed a record high in valuations that led to an 89% decline in the Nasdaq Composite and a -49.7% drop in the S&P 500. After the S&P 500 recovered to the 2000 high in 2007, the Financial Crisis led to a -57% plunge and a more reasonable level of valuation in 2009.
What history teaches us is that Secular Bear Markets are prolonged by events that were not often foreseeable. The one constant since 1901 has been straightforward: Secular Bear Markets have followed after valuations became extreme. While the next Secular Bear Market will have unexpected complications, we can identify some potential problems and challenges that could arise and have to be dealt with. Valuations are excessively high and there are significant problems on the horizon that will contribute to the next Secular Bear Market. The majority of investors will be surprised and unprepared.
Record Debt and Climbing
After World War II, Publically Held Federal Debt as a percent of GDP fell from 102.1% in 1946 to a low of 31.0% in 1981, even though interest rates were high. After 1981, lower interest rates made it easier for the Federal government to borrow more money, and annual interest costs fell. The Public Debt Ratio to GDP rose despite lower interest rates as Congress accelerated spending and cut taxes. Congress increased government spending during the 1990 and 2001 recessions, which kept those recessions shallow. What is noteworthy is that since 1981 Federal Debt as a percent of GDP increased, even during periods of economic growth as Congress increased spending. This was in sharp contrast to the period from 1946 to 1981, when deficit spending was constrained and there were a number of years of balanced budgets, whether the economy was in a recession or not. The Ratio of Public Debt to GDP fell during the 1950’s, 1960’s, and remained stable in the 1970’s despite higher interest rates. On the cusp of the Financial Crisis in 2007, Federal debt as a percent of GDP was a manageable 61.8%. In January, 2026 it is 123.6%.
Historically, when the Debt to GDP ratio has exceeded 90% for 5 years, average GDP growth has fallen by 35%. The increase in government borrowing will increase the cost of borrowing for consumers and businesses.
Since 1930 the annual budget deficit has only exceeded 6% of GDP during World War II, when the economy was in a recession after the Financial Crisis in 2009, and during the Pandemic in 2020 and 2021. During the Great Depression and every recession prior to the Financial Crisis in 2009, the budget deficit was never above 6.0%. In 2023, 2024, and 2025 GDP grew by 2.5%, but the budget deficit was above 6.0%. It is unprecedented to run a deficit this large outside of a recession. During the next recession, the deficit could soar to $3.5 trillion and 10% of GDP.
Cost of Servicing Record Debt
Despite the huge increase in Federal debt after 1981, Federal Net Interest Outlays fell as a percent of GDP from 3.15% in 1992 to 1.22% in 2015. This occurred because for most of the past 20 years the Federal Reserve held the federal Funds rate at historically low levels (near 0% for extended periods), and used Quantitative Easing to push longer term Treasury yields down. Federal Net Interest Outlays as a percent of GDP will be 3.2% of GDP in 2025, an increase of 303.3% in 10 years. The CBO estimates that in 2053 Net Interest Outlays will amount to 6.7% of GDP, as outstanding debt increases and the government pays a higher rate of interest on the debt.
In 2021, interest on the Federal debt was $352 billion and the Congressional Budget Office (CBO) projects it will increase to $1.4 trillion in 2033. In the next 10 years the Federal government will spend $12.9 trillion in interest, according to the Peter G. Peterson Foundation. As Net Interest Outlays rise, an estimated $12.9 trillion will be spent to service outstanding Federal debt, and not on social programs or military expenditures that in the past lifted GDP growth.
By 2034, Net Interest Outlays will exceed the spending on Medicaid, the Children’s Health Insurance Program (CHIP), Defense, and other Discretionary programs. Higher Interest Outlays will make it more challenging to maintain Social Security expenditures, which are projected to run out of money in 2034. The Medicare program is expected to run deficits in 2025 and be depleted by 2034.
The Increase in Federal Debt Is Unsustainable
Every time a recession developed in the last 60 years, the government increased spending (fiscal stimulus) and the Federal Reserve lowered interest rates to end the recession and spur a recovery. If these policy levers have become less effective, recessions in the future may last longer and the recoveries would be weaker than in the last 60 years. The following analysis discusses why Fiscal and Monetary policy levers may not be as effective during the next recession as they have been historically. Total government debt has increased from $9.2 trillion in 2007 to $19.9 trillion in 2016 to $38.3 trillion in 2026. In 2023, 2024, and 2025 the economy grew 2.6%, but the Federal Deficit was more than 6.0% of GDP. The deficit has only exceeded 6.0% of GDP during World War II, the 2008 Financial Crisis, and the Pandemic in 2020. During the next recession Congress’s response may be hampered by the historically high level of debt and the risk of running an annual deficit of more than $3 trillion and an annual deficit of more than 10.0% of GDP. An avalanche of Treasury debt supply could cause Treasury yields to increase and make a bad situation far worse. The Federal Reserve can be expected to intervene with a Negative Real Funds rate (Funds rate below inflation) and the resumption of Quantitative Easing. Aggressive monetary policy could spook bond investors and cause bond yields to rise, if investors worry monetary policy could cause more inflation or undermine confidence.
More Debt but Less GDP Growth
When the Debt to GDP Ratio was low in the 1960’s, each new dollar of debt increased GDP by $0.70 to $.90. The bang for each $1.00 of new debt has declined from the high in the 1960’s, as the Linear Trend line illustrates.
The Linear Trend smoothes out the annual volatility and unveils the long term trend. In 2020 the bang for each new $1 of debt was $.30 and a whimper of what it was in the 1960’s. The US can’t grow out of the secular stagnation process by increasing debt. Future fiscal stimulus in the next 20 years won’t be as effective in lifting the economy out of a recession, or goosing economic activity during an expansion.
Monetary Policy Is Less Effective
From 1945 through 2000, the Federal Reserve’s primary policy tool – the Federal Funds rate – was effective. The economy slowed after the Funds rate was increased and rebounded into an expansion after the Funds rate was lowered. The Funds rate was always positive, so the Real Funds rate was always above zero on the chart below. Shaded areas on the chart denote when the economy was in a recession. Starting in 2001 the FOMC was forced to drop the Funds rate below the rate of inflation to stimulate the economy. A negative real Funds rate develops when the Funds rate is below inflation, as measured by Consumer Price Index (CPI) or the Personal Consumption Expenditures Index (PCE). The Fed’s reliance on a Negative Real Funds rate since 2001 is a sign that the Fed’s primary policy tool had become less effective.
With its primary policy tool less effective, the Federal Reserve began direct purchases of Treasury bonds to push long term rates lower in response to the Financial Crisis in 2008. The implementation of Quantitative Easing (QE) expanded the Federal Reserve’s balance sheet from $900 billion in 2007 to $4.5 trillion in 2016. When the Pandemic hit in 2020 the Federal Reserve grew its balance sheet to $8.9 trillion.
The progression from just using its primary policy tool (Funds rate) to manage the economy to using negative interest rates and Quantitative Easing suggests that monetary policy isn’t as effective as it was prior to 2000.
Policy Challenges during the Next Recession
Since 1982 policy makers in the US have used a combination of Fiscal Stimulus and Monetary Accommodation to delay the onset of recessions, the depth of recessions once they occurred, and to spur economic growth. Unfortunately, the efficacy of Fiscal policy has deteriorated since the 1960’s. Each new $1.00 of debt generates just $.30 of GDP compared to more than $.90 in the 1960’s. The effectiveness of monetary policy has also diminished, which has forced the Federal Reserve to resort to using the nontraditional tools of Negative Real Funds rate and Quantitative Easing. Despite the coordination of Fiscal and Monetary policies since the 1960’s, the average annual GDP growth rate has been slowing. Despite the coordination of Fiscal and Monetary policy GDP has been trending lower since 1990.
Has the Secular Bull Market in Treasury bonds since 1981 Ended?
It’s hard to believe but in 1981 the federal Funds rate was 20.0% and the 10-year Treasury yield was 15.5%. In the subsequent 20 years, the Funds rate was lowered to less than 1.0%, and the 10-year Treasury yield dropped to 4.3%. The huge decline in the cost of money was a big tailwind for economic growth as it allowed consumers and businesses to borrow and fund purchases of homes and cars and spur business investment in manufacturing and technology. In 2020, the Funds rate was 0.12% and the 10-year Treasury yield was just 0.55%, even though inflation was above 2.0%. The decline in the 10-year Treasury yield lasted 39 years and represented a Secular Bull Market. From 1981 to 2020 each low in the 10-year yield was lower and every increase in the yield was also lower, which is the definition of a downtrend. The 10-year yield reached 5.0% in 2023 so this pattern of lower highs has been broken, and suggests the Secular Bull Market in Treasury yields is over.
The 10-year Treasury yield bottomed in 1945 at 2.0% and began a trek higher that didn’t end until 1981. As the 10-year yield moved higher each higher was higher and each low was higher than the prior low. This is the definition of an uptrend. This Secular Bear Market lasted 36 years.
The breakdown in Treasury bond prices is especially clear on the chart of the 30-year Treasury bond. The upside breakout in the 10-year Treasury yield and breakdown in the price of the 30 year Treasury bond prices suggests that a new Secular Bear Market in Treasury bonds has begun. Given the length of the last two Secular trends the new Secular Bear Market could endure for 20 to 30 years.
During the Secular Bull Market (1981-2020), consumers could afford to buy more cars and buy larger homes. Corporations were able to invest more and roll over existing debt at lower rates, which lowered interest expense. The government could roll over debt and keep interest expense manageable even as federal debt increased massively. As the government and corporations roll over existing debt at higher yields, interest expense will climb, even if yields remain near current levels. But if Treasury yields increase in coming years interest expense will become a larger headwind that will weigh on consumer spending and business investment and on economic growth.
Political Polarization
The capacity to effectively deal with big problems that are likely to impose unwelcome changes on the majority of Americans is dependent on the ability and willingness of political parties to work together in times of stress to compromise and do what’s best for the country. This is what happened during the 1930’s and 1940’s, when the country was ravaged by the Depression and threatened during World War II. In confronting these enormous challenges, Americans came together to accept sacrifices large and small to strengthen our country.
Much credit is due to President Roosevelt’s leadership and the willingness of the political class to work for the common good. That comity began to unwind in the 1960’s and 1970’s as Civil Rights, the Viet Nam War, and inflation provided reasons for the political class to work at cross purposes. Divisiveness accelerated after Republicans took control of the House in 1994, the hanging Chad election in 2000, and the Iraq War in 2003. Rather than pulling Americans together, the Pandemic widened existing fissures, the murder of George Floyd reignited racial unrest, and the acrimony surrounding the election in 2020 and election in 2024 has pushed many Americans even further apart. The current state of US politics has taken on an ‘Us versus Them’ polarization that will make it extremely difficult for compromise to be the norm, as the country attempts to deal with an economic pie that grows slowly and requires smaller pieces to be distributed. The risk of social unrest has increased, which is evident in how some communities have responded to having ICE in their communities.
In addressing the collection of factors that are likely to weigh on economic growth in the next decade, it will be necessary for the Democrats and Republicans to coordinate policy changes through legislation. We are sailing toward a fiscal iceberg of our making. If we’re going to avoid sinking the ship, Democrats will have to agree to lower government spending and Republicans will have to accept increasing taxes. Since the mid-term elections are coming in 2026, neither party will entertain upsetting the faithful in their parties, so nothing will get done in 2026. And with a bigger election coming in 2028, both parties will attempt to rally their disciples with their favorite slogans: Tax the rich! Cut taxes! The fiscal health of our country will continue to deteriorate in the next 3 years and Congress will do little or nothing to address it.
Conclusion
After building up during the prior Secular Bull Market, long term problems are addressed in the following Secular Bear Market. Secular Bear Markets consume a lot of time since it isn’t just one or two problems that must be resolved. Many significant problems become larger than the sum of the individual challenges. In the last 60 years, Monetary and Fiscal policy have been used in conjunction to stabilize the financial system and spur economic growth. After an increase in government debt from $21 trillion to $36 trillion in 2024, the options available to policy makers to address the next recession will be more constrained as this discussion illustrates. Monetary policy may also be constrained if inflation stubbornly holds above the FOMC’s 2% inflation target.
How to Navigate a Secular Bear Market
The Coming Secular Bear Market can be managed since you now know that it’s coming, but you’ll need to adopt the appropriate investment strategies that can augment the Buy and Hold approach. I think I can help you with that.
Most investors are told to Buy and Hold and ride out the bumps along the way. This is great advice during a Secular Bull Market, as market declines are usually short lived and the market subsequently marches to a new high. But investors weren’t rewarded by the Buy and Hold strategy during the Secular Bear Market from 1966 to 1982 that left the Dow Jones Average at 780 in August 1982 and well below the high of 985 in January 1966 16 years earlier!
During the 1966 -1982 Secular Bear Market Buy and Hold investors were forced to endure declines of -25.1%, -35.9%, -45.0%, -26.8%, and -24.1%. These big declines were followed by rallies of +32.3%, +66.6%, +74.9%, +2.2%, and +37.8%. After 16 years of depressing declines and terrific whip saw rallies, investors had made little or no progress in preparing for retirement. They were however 16 years older.
In order to avoid the large declines that develop in a Secular Bear Market and take advantage of the significant rallies that emerge, I combine Fundamental information and Technical Analysis.
In late 2007 I warned that the stock market was vulnerable to a bear market and in July 2008 explained why a financial crisis was brewing. In January 2022 I warned that the Federal Reserve would aggressively increase the Funds rate which would cause the S&P 500 to decline by more than -15%. In February 2025 I wrote that President Trump was serious about raising tariffs which the stock market wouldn’t like. These were the Fundamental reasons why the stock market would become vulnerable to an increase in selling pressure. Technical analysis helped identify when the stock market was likely to break down. One of the tools I use is the Advance – Decline Line.
The construction of the Advance – Decline Line is straightforward. Each day the net of all the stocks that declined are subtracted from the number of stocks that went up. The Net is then added to a running total to create the Advance – Decline Line. When the Line is rising it shows that more stocks are going up on the majority of trading days. When it is falling, more stocks are going down. In a healthy market more stocks go up and the A-D Line continues to move higher. When the economy is doing well, earnings are rising, and most stocks are reflecting that. When the economy enters a recession, most company’s earnings falter and so do their stocks, which causes the A-D Line to consistently decline.
As the economy transitions from growth, to slowing down, and toward a recession, fewer stocks rally and the A-D Line weakens. Since 1928, the A-D Line has consistently weakened even as the S&P 500 records a higher high. The divergence between the S&P 500 and the A-D Line creates a negative divergence and signals that the market is vulnerable to any negative news.
Here’s a few example of how combining Fundamental information and Technical Analysis and the A-D Line helped me anticipate the decline in 2025, 2022, 2007, 2001-2002, 1990, and 1987.
This is an excerpt from the February 24, 2025 Weekly Technical Review. “The Advance – Decline Line failed to confirm the new high in the S&P 500. As I’ve discussed this is a warning sign of danger, especially in light of the cloud of uncertainty and the potential for a Trade War or at least a skirmish breaking out in coming weeks.” The technical trigger for the decline was the S&P 500 dropping below 5890. “The choppiness of the last two plus months still allows for a rally above 6147 as long as the S&P 500 holds above 5890 (red trend line).” The chart below is from the February 24, 2025 Weekly Technical Review. The S&P 500 dropped under 5890 on February 27 and the rout was on.
Although the Fundamental information was different in January 2022 (Fed rate hikes were coming), the A-D Line failed to confirm the new high in the S&P 500 on January 4, 2022 after peaking in November 2021. As the FOMC increased the Funds rate in 2022, the S&P 500 declined -27.5%. In 2007, the A-D Line peaked in June and didn’t confirm the S&P 500’s higher high on October 7, 2007. As the housing debacle evolved into a crisis, the S&P 500 subsequently declined by -57.6%. I discuss the Advance – Decline Line and other Technical Indicators in the Weekly Technical Review and monthly Macro Tides.
I’m happy to provide you a summary of my Fundamental and Technical analysis during 2007 through 2009, if you would like to read it.
In 2009 Financial Planner Dave B. became a subscriber, after doing 150 hours of due diligence. Sixteen years later Dave is still a subscriber. What convinced him was that I was negative prior to the crisis and then turned positive on the stock market in March 2009.
Dave B. Due Diligence “After the 2008 and 2009 crash I looked for sources who had recommended getting out of the market in 2007 and 2008 but who had then turned bullish in February or March of 2009. While there were lots of people warning of impending doom in 2007 and 2008, they were still warning of impending doom in 2009 and 2010. And while many were bullish in the spring of 2009, they were bullish all through the crash as well. After my extensive research (I spent well over 150 hours retrieving and reading available publications) I found only three who met my criteria for roughly “getting it right”. Jeffrey Gundlach Ned Davis and Jim Welsh. Jim does a great job of blending fundamental and technical analysis and communicating in a way I can understand. He is able to read the Fed minutes and identify gaps between what the Fed is saying and how it is being interpreted by the market.” Dave B. Independent Financial advisor.
Intersection of Monetary Policy, Economic Fundamentals, and Technical Analysis
The majority of investors will not be prepared for the coming Secular Bear Market. They will continue to Buy and Hold equities, even as the stock market delivers negative returns. There are few strategists that have the experience, knowledge, and combination of skills to help you navigate the financial markets. I am one of them.
The complete recap of my analysis of the Financial Crisis from 2007 -2009 is available. All you have to do is send an email to JimWelshMacro[at]gmail[dot]com. I hope you found ‘The Coming Secular Bear Market’ informative and a wakeup call. It’s time to consider including a Tactical Investment Strategy as part of your portfolio allocation. If a Secular Bear Market has begun in bonds, the classic 60 % stocks – 40% bond allocation won’t provide a safe haven.
I’m offering you a 50% discount on the first month of a monthly Plan subscription to the Weekly Technical Review or monthly Macro Tides. MacroTides.com The promotion code is: GOLD
Send an email to JimWelshMacro[at]gmail[dot]com to learn how I can help you, or visit MacroTides.com. The ‘Weekly Technical Review’ is published every Monday evening and the monthly Macro Tides is sent out on the 1st of each month.
