Unexpected Returns: Understanding Secular Stock Market Cycles

Unexpected Returns: Understanding Secular Stock Market Cycles

by Ed Easterling


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Why is the stock market acting differently in the 2000s than in the 1980s and 1990s?

Before you read any how-to investment book or seek financial advice, read Unexpected Returns, the essential resource for investors and investment professionals who want to understand how and why the financial markets are not the same now as they were in the 1980s and 1990s. In addition to explaining the fundamentals, this book takes you on a graphic journey through the seasons of the market, tying together economics and finance to show why the stock market does what it does. Using comprehensive full-color charts and graphs, it offers an in-depth exploration of what has changed over the past five years - and what you can do about it to avoid disappointment with your investments. This unique combination of investment science and investment art will enable you to differentiate between irrational hope and a rational view of the current financial markets. Based on years of meticulous research, it provides the sensible conclusions that will drive your future investment choices and give you the confidence to rely on your investment outlook, whatever your financial strategy.

All rights reserved. This book may not be reproduced in whole or in part, by any means, electronic or mechanical, without prior written permission from the publisher.

Copyright by Ed Easterling

Product Details

ISBN-13: 9781879384620
Publisher: Cypress House
Publication date: 03/28/2005
Pages: 296
Sales rank: 1,037,858
Product dimensions: 6.38(w) x 9.20(h) x 0.99(d)

Table of Contents



Chapter 1: Planning the Journey

The Right Frame of Mind
Ten Key Concepts

Chapter 2: The Principles

Final Preparation


Chapter 3: Stock Market History

The Stock Market Matrix: Taking the Red Pill
About Returns and Assumptions, and Making Them Relevant
Generational Returns -Twenty-year Returns
Significant Swings
Why Volatility Matters
Stock Market Yo-Yo
Must Be Present to Win?

Chapter 4: Interest Rates and the Inflation Roller Coaster

Overview of Interest Rates
Overview of Inflation
Interest Rates and Inflation
Dynamic History
The 6/50 Rule
Key Concepts for this Section: Market History


Chapter 5: Secular Cycles

Secular Market Profile
Stock Market Profile Across Secular Periods
Inflation, Deflation, and Market Seasons
Dispelling the Myth: It's Actually Not the Economy
The Y-Curve Effect
Valuation Matters

Chapter 6: The Current Cycle

Current Market Cycle
The Dividend Insight
Looking Ahead
Key Concepts for This Section: Secular Cycles


Chapter 7: Financial Physics

Predicting the Future of the Stock Market
Building the Financial Physics Model
Financial Physics: A Tool for Valuing and Predicting the Market

Chapter 8: Implications from Financial Physics

The Voyage So Far
Looking Forward in the Market and in the Book
Valuation Cascade: A Natural Upper Limit for P/Es
Dissecting Returns: Forecasting Stock Market Returns
Limited Returns and Market Vulnerability Going Forward
Key Concepts for this Section: Financial Physics


Chapter 9: Investment Philosophy

Absolute Return and Relative Return Investing
Risk Can Be a Friend or a Foe
Return Profiles
A Little History: The Devil's in the Assumptions

Chapter 10: Row, Not Sail

Sailing and Rowing
Drowning in Averages
Key Concepts for this Section: Investment Philosophy


Chapter 11: Investment Techniques for Traditional Investors

Effective Bond Portfolios
Rebalancing Stock Market Portfolios

Chapter 12: Investment Management Evolution

A Brief History
Hedge Fund Investing
Vision of Future Investment Management
Closing the Loop
Ten Key Concepts


Chapter 1: Planning the Journey
Chapter 2: The Principles
Chapter 3: Stock Market History
3.1 Stock Market Matrix
3.2. DJIA: 1965 to 1981 & 1982 to 1999
3.3 Generational Returns: Twenty-year Periods
3.4. Stock Market Returns Based Upon Starting P/E Ratio (1900-2003)
3.5. Twenty-year Rolling Stock Market Return & Change in P/E Ratio
3.6 Significant Swings (Dispersion of Annual Stock Market Changes)
3.7. Volatility Gremlins (DJIA: 1900-2003)
3.8 Impact of Volatility and Negative Numbers
3.9. Volatility and Market Returns
3.10. Almost 50/50: Positive and Negative Days in the Market
3.11 Profile of Best and Worst Days

Chapter 4: Interest Rates and the Inflation Roller Coaster
4.1. Bond Yields and Inflation (20-year T-Bond vs. CPI)
4.2. 50 Basis Point (0.5%) Boundary
4.3. Interest Rate Changes within the Subsequent Six Months
4.4. Interest Rate Changes in Percentages

Chapter 5: Secular Cycles
5.1. Secular Bull and Bear Markets Profile
5.2. Stock Market Dispersion during Secular Cycles
5.3 Stock Market and Economic Growth
5.4. P/E Ratio and Inflation
5.5. Impact of Starting P/Es)

Chapter 6: The Current Cycle
6.1. S&P 500 P/E Ratio Since 1900
6.2. S&P 500 Dividend Yield Since 1900
6.3. S&P 500 Inflation: CPI Since 1900
6.4. Interest Rates: 20-year Treasury Bond Yield Since 1900
6.5 Dividend Yield and P/Es
6.6. Valuation Matters: 1982-1999
6.7. Valuation Matters: Low Inflation
6.8. Valuation Matters: Average Inflation

Chapter 7: Financial Physics
7.1. Financial Physics Model
7.2. Economic Growth: Constant over Time
7.3. Earnings per Share Related to Economic Growth
7.4. Earnings per Share Is Highly Predictable over Time
7.5. EPS Predicted from 1975
7.6. Relationship of P/E Ratios and Interest Rates: 1900-2003
7.7. Relationship of P/E Ratios and Inflation: 1900-2003
7.8. Earnings per Share Related to Economic Growth
7.9. EPS Predictable over Time
7.10. Relationship of P/E Ratios and Inflation

Chapter 8: Implications from Financial Physics
8.1. Dividend Discount Model
8.2. Spread between 20-year T-Bonds & 1-year T-Bills
8.3. Valuation Cascade: Impact of Inflation on P/E Ratios
8.4. S&P 500: Dividend Yield vs. P/E
8.5. Financial Physics Model
8.6. Components of Total Return
8.7. Market Price Change Components
8.8. Six-Year Annualized Returns Since 1900
8.9. Six-Year Annualized Return Components
8.10. Future Stock Market Return Scenarios

Chapter 9: Investment Philosophy
9.1. Relative Return Profile
9.2. Absolute Return Profile

Chapter 10: Row, Not Sail
10.1. Secular Bull Market Chart
10.2. Secular Bear Market Chart
10.3. Historical Price/Earnings Ratio
10.4. Dividend Yield vs. P/E Ratio
10.5. Inflation and P/E Ratios

Chapter 11: Investment Techniques for Traditional Investors
11.1. Yield Curve Example
11.2. Breakeven Yield Curve
11.3. Bond Ladder Returns
11.4. Rebalancing in Secular Bull Markets
11.5. Rebalancing in Secular Bear Markets

Chapter 12: Investment Management Evolution
12.1. Hedge Fund Structure: Artistry of Design
12.2. Hedge Funds: Common Elements
12.3. Portfolio of Hedge Funds

What People are Saying About This

John F. Mauldin

"Ed Easterling has given the world of investing the single best, easy-to-read, study of stock market cycles of which I know. He lays out a path for you to find your own Unexpected Returns, showing you how to confidently navigate the waters of market volatility. Serious investors will devour this book and profit. It should be required reading for investment professionals."
President, Millennium Wave Investments, author of Bull's Eye Investing

Harvey Rosenblum

"Unexpected Returns provides a broad, deep, and provocative exploration of the factors that determine stock market investment returns over a person's lifetime. Of special interest to me, as a Federal Reserve policy advisor on monetary policy, is Easterling's exploration of the critical role of low and stable inflation as a key determinant of stock market performance."
Senior Vice President and Director of Research, Federal Reserve Bank of Dallas

Richard Sylla

"Unexpected Returns is at once a penetrating analysis of more than a century of stock market experience and a realistic guide to how we may expect the markets to perform in the years ahead. Easterling's findings and conclusions are grounded on the best economic and financial thinking of our time. This is a book for the serious investor and student of the markets."
Henry Kaufman Professor of the History of Financial Institutions and Markets, Stern School of Business, New York University, co-author of A History of Interest Rates

Bill Mann

"The stock market is one of the few places on earth where people become more excited to buy when things are expensive, and more anxious to sell when things are cheap. Ed Easterling has penned a masterful accounting about why this is so wealth-destructive, presented without preconceived notion or bias."
Senior Editor, Investing, The Motley Fool

Rob Arnott

"People are accustomed to the vagaries of market cycles. Far too few realize that these are subsumed within secular bull and bear markets, spanning decades not years. Ed Easterling has done a fine job of describing how these long cycles work and how the investor can plan investment strategies accordingly."
Chairman, Research Affiliates, LLC; Editor, Financial Analysts Journal

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