Unexpected Returns: Understanding Secular Stock Market Cycles

This is a fantastic book. Gives great reasons as to why future returns are going to be low. Also talks about the critical need to move from Buy and Hold to a more skill based investing approach (i.e. trading on TA ?). The only negative, I see is that he does not elaborate much on what skills/techniques are needed to move to skills based technique. I guess..for that you can invest through his firm.

I almost stopped reading this book. Easterling spent so much time building credibilty for his work that I nearly fell asleep. THEN when he started talking about the stock market, what factors really determine the long term prices and valuations of markets, well, that's when this book took off. Great stuff. Written for the non-technical reader but doesn't talk down. I thought the charting of various variables in stock market trends and tendencies to be very friendly to read. Easterling spent the time to literally do the graphs and charts in color and that was a nice change of pace. He doesn't claim to be a seer, he simply does a brilliant job of laying out piece by piece, how to calculate the future of the stock market. Truly well done and one of the top four or five investment/stock books of the year. When you read something this well done, you can only appreciate the author and his love, and depth of knowledge of his subject. Kevin Hogan, Psy.D. Author of The Psychology of Persuasion and The Science of Influence

Ed Easterling has penned one of the most insightful "big picture" books about the stock market ever written, in the same esteemed category as "Triumph of the Optimists" and Jeremy Siegel's "Stocks for the Long Run." Easterling uses a wealth of data to show that the critical component of long-term excess returns is not earnings growth, dividend yield, or luck, but expansion of the price/earnings ratio. Typically, P/E expansion happens in a slowly falling interest rate environment with mild inflation (2-3%) and stable economic conditions. Remind you of the 1990s? By contrast, P/E contraction happens during times of econonomic instability, unexpected deflationary or inflationary pressures, or rising interest rates. Remind you of today? If you invest most of your money at a time when P/E ratios are well above the long-term historical average (as they are now), the best you can hope for is an average long-term return (7%-10%), assuming P/E ratios do not decline over your lifetime. The odds are, however, that the market P/E will revert to its long-term mean over your investing lifetime because interest rates are likely to move higher and inflation is not likely to remain benign forever. While this point seems intuitive, few market participants acknowledge the simple interrelation between interest rates, inflation, uncertainty, P/E ratios, and long-term stock market returns -- a mistake that has huge ramifications, and has a high probability of causing disappointment with the stock market in coming years. The book isn't just a bearish tome, however -- Easterling presents realistic strategies for overcoming the problem of declining P/E ratios. He lays out the problems using data to back up his case, then presents solutions. Investors would do well to heed his advice.

The stock market's phenomenal rise from 1982-1999 and equally impressive fall beginning in 2000 naturally led many to question the buy-and-hold, "stocks for the long run" conventional investing wisdom of the 1990's. Among the questions: do secular bull and bear markets really exist, and how long do they last? Can we know what causes them? Are they predictable? Can we know which market phase we are experiencing now? If so, what practical benefit does that provide us in forming an investment strategy and making investment decisions? These are all timely and important questions, and a new book, Unexpected Returns by Ed Easterling, is the most elegantly structured treatment of the subject that I've seen to date, presented with clear historical data to back up the arguments. The surprising thing is how much the average investor experience depends upon stock prices relative to earnings or dividends, and whether these multiples expand or contract during a given investment period. There is a wonderful chart on page 80 of Unexpected Returns that shows just how much investors are dependent upon changes in P/E ratios, not earnings growth, over time for their returns. Easterling shows clearly that the best environment for P/E ratios is when inflation is low and stable and approaches price stability. The further conditions stray from this low-inflation, price stability environment, the greater the downward pressure on P/E ratios. Historically, the highest levels of inflation (such as those experienced in the 1970's) and the most extreme examples of deflation (such as that in the early part of the 20th century in the U.S.) correspond with historically low P/E ratios. One of the strongest points emphasized by the book is that interest rates and inflation have never been stable for long, and the recent condition of low inflation price stability is a historical anomaly. As long as the current benevolent inflation / interest rate environment lasts, stocks can support P/E ratios in the low 20's; the sooner it changes, and the more drastically, the farther P/E ratios will have to fall. The evidence, as Easterling lays it out, makes it far more likely that the stock market's nice performances in 2003 and 2004 represent nothing more than a typical bear market rally than the beginning of a new bull market. Stock prices and interest rates similar to those prevailing today have historically marked the ends of bull markets, not their beginnings. The recognition of the conditions of a secular bear market requires a different investment strategy than does a bull market - as Easterling would say, row, don't sail. Unexpected Returns is compact, highly readable, and offers compelling historical evidence for the inevitability of secular bull and bear markets, what drives them, and the clear signals that can be used by enlightened investors to determine the prevailing market cycle in order to improve results in any market environment. (The review above is a shorter versi

As an investment advisor employing both fundamental and technical analysis, the "Secular Bear Market" seems to me an obvious theme. Major stock market indexes are currently as low as they were in 1998. Six years of a secular bear market and most investors are still using the same strategies that worked in the rising markets of the `90's (buy and hope). This trend is nothing new; stocks have cycled 8 times from upward to sideways, over and over, about every two decades since the 1901. Traditional "buy and hold" relative return strategies rely on the direction of the markets. They enjoy gains when they occur, suffer loses when the market declines, and require a long time horizon that many investors don't have. Skill-based tactical strategies seek gains regardless of market direction using investment manager skill in sector rotation, hedging strategies, and risk management. As Ed says in the book, when the wind is blowing we can let out the sails and enjoy the ride. When the wind stops blowing, you can sit there and wait the wind to come again, or you can get out the ores and start rowing. Based on current technical and fundamental research, it seems the wind may not cast our sails and the ores are now necessary to get where we want to go. This book is truly a remarkable account of the markets history. Very well written and compelling research that all investors must understand. Mike S.