Tuesday, September 16, 2008

When will it stop?

Back in 2000 the chief strategist for one of the now last remaining major investment firms stated we were entering a long term flat equity market. He was one of the few who pleaded with the brokers to get their clients out of technology investments in 2000 and was always measured, rational and pragmatic in his advice. That advice has kept me fairly ambivilent to the market for the past eight years.

At the moment the investment markets are the only news and presidential candidates are working hard to appear knowledgable while media pundits put on brave but excited faces. I don't like excitement in investing. It clouds judgement. In the interest of stepping back, let's examine the longer term markets of the past one hundred years. That should be enough to flatten out the specific market moving events and focus on longer term.

I've used the Dow Industrials average as the benchmark because the S&P did not exist back far enough. The readers can reach their own conclusions as far as appropriate strategies if history is any guide.

In the past century there have been three complete bear markets and three secular bull markets. Market cycles are like bubbles, you don't know you are in one until it is over often. Secular Markets are the result of longer term underlying economic conditions unlike cyclical markets which are of shorter duration and occur within the longer term theme.

Secular Bear Markets vs Secular Bull Markets and Dow Performance

Secular Bear_____ Duration_____ Avg Yearly
Markets_______ (Years)_____ Return
1906-1921_____ 16 ________ 1.58%
1929-1949_____ 21 ________ 1.69%
1966-1982_____ 17 ________ 1.59%
2000-2008???____ 9 ________ <0.6%>

Secular Bull Markets
1922-1928______________7 year_____ 17.20
1950-1965_____________16 year_____10.60%
1983-1999__________ 17 year_______ 15.30%

Were the equity markets to begin a new long term bull market it would mark the shortest secular bear market in a century. With interest rate declines the single most important impetus for for market valuation, the current low level of interest rates do not provide a catalyst in the immediate future.

Low levels of savings, asset devaluation and financial under capitalization issues also do not indicate the factors to fuel a longer bull market are in place. Individuals are going to have to be more flexible in investing and more diligent in savings to attain the future goals that investment and real estate markets once passively and effortlessly provided.

John Barnyak