We are now in the midst of the bursting of the Big Government bubble, and the market is churning on EU debt fears. This Glimpse Into the Future of the Stock Market and Dollar takes a doom-agedon view of things, looking at the 100 year Dow Jones stock market chart and declaring: “The implications of this chart are not exactly Bullish, as it targets a long-term bottom between 1,000 and 600.”
Ahem. 1,000 would be less than 10% of the current DJIA level, of 11,300. So you could buy the entire stock market for a PE of under 2? The only way a 90% decline could happen is the same way it happened in 1929 to 1932 – A Great Depression. Earnings would have to collapse, the global economy will have to melt down in Global Depression 2.0, and we’d be eating grubs and twigs and burning our worthless bank statement for warmth. The fallaciousness is obvious – you cannot predict such an extreme economic outcome just based on extrapolating from lines on a backward-looking stock market chart.
That same chart tells me a different story. In American stock market history, we have had period of “super-bull” cycles and “super-bear” cycles of 10 to 30 years each. In super-bulls, buy and hold got you multiple returns on your investments over 10 to 20 years. In super-bears, the market went up and down but didn’t crack previous highs; it was a ‘going nowhere’ market, where buy and hold folks either lost money or just broke even. Today, we are below the level of the market back in the tail end of the 1980s-2000 super-bull. The market has gone nowhere in 11 years, just like it spent 14 years in 1968-1982 going nowhere. The previous ‘going nowhere’ periods were also long ones, from 1908 to 1922, and the market took 25 years to recover from the crash of 1929.
Better questions might be: What is a reasonable low for this current super-bear ‘going nowhere’ market? I have an answer for that, the market level reached in march 2009 was a powerfully oversold and undervalued level, reached at a time when “Great Depression 2” was viewed as a plausible economic outcome, and given fundamental valuations it would be unlikely such lows would be breached. Moreover, didnt stay near that level long.
When can we expect the start of the next super-bull? Two prior super-bears took about 14 years to play out, and the Great Depression super-bear from 1929 ended in 1946, or 17 years. So sometime between 2013 and 2017 a new ‘super-bull’ cycle will start. Putting a partisan hat on, I’d point out that the 1946 super-bull started with a Republican Congress sweeping to power, and the 1982 super-bull was kicked off by President Reagan pushing through his Reaganomics. It’s not hard to predict that the replacement of Obama with a more market-friendly Republican could sow the seeds of a new super-bull.
How long will it take for the Nasdaq to reach 5,000 again? A worst-case bubble-then-depression required 25 years to recover to the peak value. So the Nasdaq would recover to 5,000 no later than 2025 if it were to follow a similar trajectory.
Until the super-bull kicks off (and we won’t know we are in it until the 1500 S&P level is breached), we are prone to further market dips, which in turn will bring more pessimistic doom-and-gloom predictions.