It seems that every new down leg of the bear market brings with it fervent cries that this is the bottom, that this is indeed the real thing. However, the market, as bear markets always do, pays no heed to the proclamations and continues relentlessly downward towards where bears always head during this season of the stock market cycle: hibernation at oversold and undervalued market levels.

As market pundits and Wall Street analysts clamor for the attention of the financial media spotlight by issuing all manner of bullish assessments in hopes of feeding investors' starving appetites for hope, most continue to overlook an astonishingly obvious fact: bull markets have never begun from historically overpriced levels of stock valuations.

Despite unceasing justifications for why "this time it's different" and why historical valuations are no longer relevant, the S&P 500 remains far above its average (since 1926) P/E ratio of 16 while the NASDAQ, having suffered from pummeled earnings data, remains in the stratosphere. Those valuations are not likely to inspire the kind of capital inflows required to create and sustain a bull market.

Historically, when the stock market's P/E has risen above 22, the annual return for stocks over the next decade has averaged between 4-5%, depending on how it's measured. Considering that the S&P 500's P/E held above 22 for quite a few years, it will require some particularly nasty negative returns to pull the average down towards the historical post-bull median of 4-5%. Combine that with the fact that the 1990s witnessed stock market gains of well above the long-term average of 10-11% per annum, and you can see again that only years of seriously sub-par returns will restore the historical record.

But even if the stock market has seen its lows for this cycle, to suggest that stocks are now a buy would require total ignorance of logic, reason and history. As even the most casual perusal of the historical record will clearly demonstrate, bear markets do not turn on a dime and develop into new bull markets. Rather, stock prices stay depressed for extended periods of time as investors lick their wounds. The reason? Simple human psychology.

Like the hung-over fraternity boy swearing off beer forever following a particularly nasty bender, it takes a while for investors to grow desensitized, to forget the smell of crushing investment losses. And that first "drink" isn't generally taken with gusto, exuberance and enthusiasm. One must work his way up, in cautious fits and starts, to the next full-blown bender.

The bull move from 1949-1966 followed years of retracement and sub-par returns after the 1929 crash. Twenty years and a P/E ratio of 8 were some of the ingredients required to cook up the next major bull market soufflé. Similarly, the peak of that move was followed by 15 years of back and forth action and no steady or meaningful annual return on investments. The P/E on the S&P 500 sank to below 7 before the explosive 1982-2000 bull market was launched.

Clearly, major bull markets do not begin until the preceding bear market has run its course and returned stocks to cheap levels. Are we at cheap levels today? With the S&P 500 trading at multiples above 21, we're not even close.

But must the stock market return to its historical estimations of value? Not necessarily. History doesn't define or predict the future, it merely provides us with a good example of recurring tendencies in economic activity. Perhaps this time it really is different? Possibly. But the unabated and firmly entrenched downtrends that the markets have been locked into for months suggest a different story. Despite guesses and baseless estimations that "we must be near a bottom", the market has yet to offer even a shred of evidence that this might be the case.

Perhaps the S&P 500's P/E need not return to 7 or 8 for the next bull market to begin. But is it reasonable to expect that things are so different today, that productivity gains and the IT revolution have created conditions under which a P/E of over 21 can serve as the springboard for the next bull market? That's very doubtful. It's not even an intelligent guess. 22 is far closer to a bull market extreme than to a bear market low.

As with all things, achieving strong returns in the stock market requires patience. One can't expect to run two marathons in two days. Everyone needs time to rest, to recuperate, and to rebuild strength ahead of the next race. Similarly, to expect the stock market to shift immediately into its next bull market marathon is simply absurd. It has never happened before and it is extremely unlikely to happen this time.

If 100 years of economic history are any indication, if human psychology hasn't changed to any great degree in the past century years, (and it very likely has not), the next bull market is not right around the corner. In fact, it's not even in this part of town.

Mark M. Rostenko

March 23, 2001

Mr. Rostenko is a veteran of Chicago's Commodity Pits and editor of The Sovereign Strategist financial newsletter at www.sovereignstrategist.com.