Where is the turning point?

Before an investor determines the exact nature of the stockmarket,that is,whether it is a diminished bull market or the beginning of a bear market he needs to know it's overall direction.Are we in a bull market or a bear market?Furthermore if we are in a bull market when will this bull market turn down?There are a number of key indicators that can tell whether we are turning down or upwards.
  I,myself, have a Master's degree in economics and my major was in business cycles. I have studied business cycles since before the second world war and have seen them change. I found that there is a strong correlation between business cycles and the stock markets. It is very difficult for there to be a bear market and have an economic upswing.However there are shades of grey in between that are very hard to tell and they do presage further swings upwards or downwards.This is where work must be done in order to tell how close we are to the turning point.
     The new Business cycle
 Since the second world war the average business cycle has lasted four to six years. And it had a"V" shape;production and incomes went down substantially in the first two to three years and back up even more in the following two to three years.This was a fairly violent change in incomes although overall total production and income increased  over the five year period.One of the main problems with this dramatic change in incomes was the affect on unemployment. Unemployment in the first two years or the downswing(and even in the third year) went up dramatically. People demanded that governments do something about this dreadful situation.And they did. This was the beginning of Keynesian Economics.
 John Maynard Keynes ,a British economist, realized that the dramatic drop in income and production was caused by a drop in aggregate demand.And this could be remedied by an increase in government  spending.The government bought more bonds from the commercial banks and deposited them so the bank reserves went up and the banks were able to lend out more money.This was government created demand.This increased bank loans and hence total production.The effect  of the increased demand was an increase in jobs and a reduction in unemployment.This was the beginning of using increase in government spending to reduce unemployment.
  The "U" Shaped Business Cycle
 History proved that increased government spending did remedy the high level of unemployment.It did not eliminate it but it did dampen it.In fact,the dampened demand modified the shape of the "V" cycle.It reduced the depth of the cycle and it lengthened it's duration. The four year cycle turned into a seven or eight year cycle and the "V" cycle turned into a "U" cycle.However the "V" cycle showed increases in production and incomes of 5 and 6% in the upper part of the cycle.Now there were three to five years of 2 to 3% increases in growth;economic growth had been dampened.Reductions in income and employment had been reduced but so had the increases in the upper part of the cycle.This produced the shape of the "U" cycle.
     Stockmarket Indicators
The question is,does the downturn in the economy coincide with the turndown in the stockmarket?Do the stockmarket indicators correlate with those for the economy?The key indicators for whether the stockmarket will go up or down are the price/earnings ratio and the dividend yield.Not these ratios for an individual stock but for the entire TSX index.It is generally considered that a healthy P/E ratio is 15.Below 15 is a time to buy and above 15 is a time to sell.The yield is the dividend amount(in dollars)divided by the price of the stock.If the dividend yield for the index is above the 10 year government bond yield  but rising  then dividend yields will still climb and this is an indicator to  continue buying stocks .If the index dividend yield is below the 10 year bond yield and falling then it is time to sell stocks and buy bonds.The price of bond yields will rise soon and earnings will drop.
 Generally speaking when the economy is in a downturn the P/E ratio will be below the average of 15 times earnings.And the P/E ratio moves up when the economy moves into the upper part of the cycle.When dividend yields are low and below the 10 year bond rate, the cycle is near the bottom.This indicates earnings will soon start to increase and so will dividend yields.Conversely when the P/E ratio is 15 or higher and the dividend yield is above 3.5% the market has peaked.Price will be heading down soon and this is time to sell stocks.
     Shades of Grey  
  So when the bond  yield is still above  2% but falling the investor should be in the stock market.Bond prices are falling and the investor can earn more on dividends. The TSX index dividend yield is typically between 3 and 3.5% in a bull market.But when the 10 year government yield is above 3.5% it is time to think about moving back into the bond market to get forthcoming  gains.It is likely that the stockmarket has peaked.Now we are at the top of the "U" curve and the P/E ratio is at a maximum or near to it.There is no hurry as the P/E ratio is close to 15 but will rise for awhile only temporarily.
 The tie-in here to the economy is through earnings.As the economy slows down the growth in earnings starts to slow down.And as the growth in earnings slows the P/E ratio will automatically rise.That is because earnings will remain constant and the price will continue to rise slightly.Stocks will become more expensive. At a certain point the P/E ratio will remain close to or above 15 and the dividend yield will approach 3.5%.The 10 year bond yield will start to move up reflecting higher risk in the  economy .However the price of bonds will now move downwards and some investors will pull their money out.While other investors will move into alternative investments such as cash or gold.
  Conclusion
  This study does not look at the amount of capital appreciation in the price of their stock nor in the price of bonds specifically.This paper looks at the direction of markets not the magnitude of the gains.This depends to a large degree on the astuteness of the individual investor.
 The main theme that is explored here is that there is a strong correlation between the movement of the economic cycle and the movement of the stockmarket.There are indicators that can be used to tell when the business cycle is moving downwards;these indicators also tell that the stockmarket is moving downwards.There are specific numbers that can be used to tell just how close the stockmarket is to the turning point.Principally the economic growth rate and the length of the "U"curve.
 We have concluded that we are presently in a "U" shaped business or economic cycle.And the bottom was in March, 2009.Since then the market has been moving up on the upwards part of the "U"curve.There has been positive economic growth from 2010 to 2013.The economic growth has gradually slowed down so that it now is expected to be only 2.5% in 2015.The"U" curve will almost be completed.
  In summary,it seems as if 2014 is going to be a good year for investors in  the stockmarket.But investors should probably cautiously in 2015 start to put their money into high quality stocks and high grade bonds.Growth and small 'cap" stocks may start to wither as interest rates move up.