This Correction Will Also End!
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BEING STREET SMART
by Sy Harding
This Correction Will
Also End! September 10, 2010.
The favorite forecasting tool of economists and investors is to extend whatever
are the current conditions and recent trends in a straight line into the future.
I was reminded of that by an article in this week’s
Bloomberg Businessweek magazine, which
began with the following;
“The U.S. economy remains almost comatose . . . The current slump already ranks
as the longest period of sustained weakness since the Great Depression . . .
Once-in-a-lifetime dislocations . . .will take years to work out. Among them:
the job drought, the debt hangover, the defense-industry contraction, the
banking collapse, the real-estate depression, the health-care cost explosion,
and the runaway federal deficit.”
The article then discloses that was Time
magazine’s analysis of the economy in its September, 1992 issue, when the Dow
was at 3,390, and the economy was still struggling to pull out of the 1991
recession.
The S&P 500 then declined another 7% to its mid-October 1992 low, which
according to our seasonal timing strategy was the beginning of the market’s next
‘favorable season’. Stocks then launched into a bull market.
Unfortunately, most investors missed out as they were still disbelieving that a
strong economic recovery could soon be underway given those miserable
surrounding conditions noted above - and especially with a newly elected
Democrat about to enter the White House.
But by 1995, with the market up 50% since 1992, sideline money finally began
returning to the market in earnest with investors scrambling to catch up. In
1999, statistics showed that more than half of all the money in the stock market
had flowed in just since 1995.
Similarly, we currently have the market muddling along, down 29% from its 2007
bull market peak, and down 9% from its April peak of this year. And, as is the
historical pattern, ravaged investors who stayed in the market too long after
the 2007-2009 bear market began, became disgusted with the stock market, and
have steadily pulled money out of stocks and stock mutual funds since, even
through last year’s big rally.
The Investment Company Institute, keeper of the statistics, reports that $40
billion was pulled out of U.S. equity mutual funds in 2009, making a total of
$239 billion pulled out over the previous three years, and the outflow has
continued this year. There is now an estimated $2.8 trillion in money market
funds, while a dramatic $185 billion has flowed into bond mutual funds so far
this year.
But when should those investors get back into the stock market if they don’t
want to go after profits from downside positions? Can we learn anything by
looking back at 1992?
The current similarities to the fall of 1992 are not only in the similar
surrounding economic conditions and uncertainty in the stock market, but also to
historical seasonal patterns, and even the political situation.
On the latter, in November, 1992, a Democratic president was elected for the
first time since 1977, succeeding a previously popular Republican president,
George Bush Sr. President Bush had become unpopular by re-election time, as a
result of the difficulty his administration was having pulling the economy out
of the 1991 recession. In another eerie similarity, that recession had been the
result of the bursting of a real estate bubble; a serious collapse of the
banking system (almost 1,000 banks had failed and had to be taken over by the
FDIC); and federal budget deficits that were at near record highs. In other
similarities to the current situation, the budget deficits were the result of
economic stimulus efforts, and the costs of the Desert Storm war to drive Saddam
Hussein’s Iraqi forces out of Kuwait.
Similar to the situation of our current president, the new president in 1993,
Bill Clinton, became increasingly less popular as his efforts to revive the
economy seemed to be taking too long, while he seemed to put too much effort
into side issues like attempting to reform healthcare.
However by 1996, contrary to the fears in 1993 and 1994, the economy was
recovering dramatically and the stock market continued in what would become the
longest and strongest bull market in history. Some of the economic highlights
included the record budget deficits that were sure to bankrupt the country being
reversed to significant budget surpluses.
Is it possible the present similarities to the early 1990’s could continue?
No one thinks so right now. The current opinion is similar to that of
Time magazine in 1992, that the “once
in a lifetime dislocations will take years to work out.”
I sure don’t have a crystal ball that’s tuned to look out five or ten years.
But I have been saying for more than a year that our work says the market should
see an important low in the October/November time-frame this year, followed by a
dramatic rally of 50% to its high next year.
That expectation of a further decline from here, followed by an important buy
signal, is based on sell signals on our technical indicators, indications that
the degree of the economic slowdown has not been fully factored into stock
prices, my belief that it’s still too early for the market to anticipate an
improving economy six to nine months out, the market’s annual seasonality, and
the history of the Four-Year Presidential Cycle.
Being reminded of the similarities to the fears and conditions in September,
1992 has me even considering the possibility that before year-end we could even
return to buy and hold being a viable strategy again. What would that be like
after the ‘lost decade’ so many investors experienced?
Sy Harding is
president of Asset Management Research Corp, and editor of
www.StreetSmartReport.com,
and the
free daily market blog,
www.streetsmartpost.com.
These reports reflect
our opinions and are based on our best judgment, but no warranty is given or
implied as to their accuracy. Past performance does not guarantee future
performance.
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