Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 29th January 2012.
The three best ways to view the secular stock market trend are via:
1. A long-term chart of the market’s price/earnings ratio.
2. A long-term price chart with the price data adjusted for changes in money supply, productivity and population.
3. A long-term chart of the market’s performance relative to gold.
One reason that these are effective methods of viewing the secular trend is that they remove changes in currency purchasing power from the picture. An alternative would be to look at a chart showing performance in nominal currency terms, but such a chart could be deceptive due to the real trend being masked by currency depreciation.
The US stock market’s real trend was masked by currency depreciation from the mid-1960s through to the early-1980s. During this period, a large reduction in the US dollar’s purchasing power transformed a major downward trend into a horizontal trading range. Something similar has happened over the past 12 years.
After we remove changes in the US dollar’s purchasing power from the equation it not only becomes clear that the US stock market has been in a secular decline over the past 12 years, but also that the US stock market’s most recent secular decline is unfolding in a similar way to the preceding episode (the secular bear market that lasted from the mid-1960s through to the early-1980s). The similarities are illustrated below via charts of the Dow/gold ratio.
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