Are we in the middle of a 20-year flat market?

We all love to have our opinions - or prejudices - confirmed by others. The latest Mark Hulbert commentary on Marketwatch does just that. Irrational exuberance redux, or how stocks now lag Treasury bills for the past dozen years, puts some flesh on what I have been saying that stocks have seriously underperformed. Of course, we can all see the disasters that are global stock markets. The important question is whether the pundit mantra that stocks are better in the long run still holds true, and what does "in the long run" actually mean?

"Consider data compiled by Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania. In his famous book "Stocks For The Long Run," Siegel reports the percentage of time from 1802 through 2001 in which stocks failed to beat T-Bills. Not surprisingly, this percentage falls as holding period increases.

But what is perhaps even more surprising: This holding period has to grow to well more than a decade in order for the percentage to drop to below 10%."

After 10 years there is still about a 20% chance that treasuries will beat stocks, whereas at 20 years this drops to just 5.5%. So only after 20 years does the buy stocks mantra come true with any certainty - that's a long time to be chanting.

Actually, if you look at a long term chart of, say, the Dow back to 1920 you can clearly see what appear to be 20-year cycles. There are 20 years of rapid growth followed by 20 years of going nowhere. The periods from about 1940 to 1960 and then 1980 to 2000 saw huge stock bull markets. What we are seeing now, scaled in percentage levels, looks horribly similar to the market of the 1970's which saw its 1975 value being lower than its 1965 one. Good to see that someone has done the number crunching to back up this purely visual feel.

What this means is that we could well be in the middle of the current 20-year flat cycle. In such a market the buy-and-hold investor is going to be treated very poorly. The only options are either to adopt a market timing strategy, or to change the stocks to bonds weighting dramatically, or both. This also means that in spite of all the bullish media talk, investors may have to keep chanting for a long time to come.