Considerably more pain will be required before patient investors have an opportunity to purchase stocks at attractive prices. Here's why.
 

Despite seven straight years of net outflows from stock mutual funds, the current bear period has yet to suffer the widespread rejection of stocks that diminished valuations and boosted dividend yields during every secular bear market of the prior century.

Today’s historically high valuation level of 22.3 suggests that pervasive capitulation remains a future event. The 1966-1981 bear market saw the Shiller P/E drop from 21 to 8. Other 20th century secular bear markets -- 1901-1920, 1929-1932 and 1937-1941 -- experienced similar reductions in valuation. The long-run median is 15.85.

Dividend yields tell a similar story. The current S&P 500 dividend yield is 2.02 percent in contrast to the long-term median of 4.38 percent. From 1966 to 1981, the S&P 500 dividend yield rose from 2.94 percent to 5.68 percent. Each of the other secular bear markets since 1901 experienced comparable boosts in yield. Dividends have generated more than half of all stock market returns over time and are now near an all-time low.

Loss of investor faith is rarely abrupt and is often impeded by interludes of euphoria. Capitulation tends to be a drawn-out, grueling process. In the 1966 to 1981 bear market, seven years passed before investors finally threw in the towel.

Patient investors may be sorely tested in 2013, but should have cash available to take advantage of fire sale prices when the majority of investors become discouraged.

Janet Briaud is chief investment officer of Briaud Financial Advisors, a fee-based financial advisory and investment management firm based in College Station, Texas, that provides services to academics and other private investors.