A BEAR market could last 20 years before sharemarkets sustainably exceeded previous peaks, a markets researcher warned yesterday.
A director of a financial research firm, Heuristic Investment Systems, Damien Hennessy, said the S&P 500 had not yet cleared the peak it achieved in December 1999, based on total returns adjusted for inflation.
He said in two similar situations in the US - during the 1930s Great Depression and the 1960s inflation crisis - it had taken an average of 17 years before the market exceeded its previous peak, adjusted for inflation.
''One thing that becomes fairly clear is really they don't sustainably break above their previous peak on those two occasions that have occurred to date until about 200 months - your 15 to 20-years period,'' he said.
Mr Hennessy's analysis allows for mini-bull markets to occur within the bear-market period before the previous peaks are passed.
''Sure, the 1960s poked its head above on a couple of occasions and there's big cycles within that [period] … so the big rallies occur, but in terms of passing the previous peak, it took 15 to 20 years.''
Mr Hennessy also pointed to periods in Japan during its ''lost decades'' in which investors could make returns of 40 per cent to 50 per cent.
But despite these strong runs, Japan's Topix is 45 per cent below its previous 1997 peak using the same measure of total returns, adjusted for inflation.
Mr Hennessy also highlighted the policy challenges facing governments and central banks, referring to the Great Depression experience of the US government - reining in spending just as economic recovery was taking place.
''From around about 1934 to 1936-37 you had quite a healthy pick-up in activity,'' he said. ''GDP [gross domestic product] started to expand nicely again, they were spending on cars, durables …
''Then, in 1937 you had two things happen. You had social security taxes for the first time, which basically tightened fiscal policy by about 2.5 per cent, and you also had the Fed [Federal Reserve] increase the reserve-requirement ratio,'' he said.
''So you had tightening in monetary and tightening in fiscal policy … it extended the Depression by about two years, basically, and deflation by two years.
''I think one of the issues the market has at the moment is just thinking: are we in the process of making another one of these mistakes?'' he said.
Mr Hennessy said investors' perspectives on present prospects for the sharemarket depended on their views on inflation, because either high inflation or deflation negatively affected sharemarket returns.
The annual inflation that most suited sharemarket investors was between 1 per cent and 3.5 per cent, associated with high or expanding price-earnings ratios, he said.
''A low-inflation period with low bond yields, such as the Fed is trying to achieve, could, as a scenario, sustain PEs at relatively high levels.''