How to Invest in the Coming Sideways Market
Here is why we may be entering a sideways market (I wrote two books on this subject), as well as how to invest in it.
I started writing my first book, Active Value Investing: Making Money in Range-Bound Markets, in 2005 and finished it in 2007. I published the second, an abridged version of the first (The Little Book of Sideways Markets), in 2010. In both books I made the case that there was a very high probability that we were amid a secular sideways market – a market that goes up and down, with a lot of cyclical volatility, but ends up going nowhere for a long time.
Sideways markets happen not because the stock market gods play an unkind joke on gullible humans but because of human emotions. Historically, sideways markets have always followed secular bull markets. At the end of secular bull markets stocks become very expensive – their valuations (P/Es) get very high. Sideways markets are just a payback for all the fun and returns stock investors enjoyed during secular bull markets.
In 1999, after 17 years of incredible returns, the mother of all secular bull markets ended with valuations we’d never seen before. For this reason, in my first book I argued that the sideways market that started then might last longer than past ones. In the Little Book I went a step farther with the benefit of hindsight – it was written post-Great Recession. I argued that the economic growth rate going forward would be lower than it was in the past, and thus this sideways market might last even longer than I originally suspected.
Both books provided a framework for how to think about paths that might lie in our future.