The 100-Year DowHumans are particularly bad at thinking about long periods of time. We have evolved with much shorter cycles: A daily sunrise, a monthly full moon, annual seasonal changes. Longer periods of time are outside of our personal experience. They create an analytical blind spot.
16-Year Trading RangeOn the 100-year chart, take a close look at the bear market prior to the most recent bull. It's the 1966-82 trading range. On the long-term chart, it looks like a fairly benign flat range. In reality, it was a volatile, dangerous period:
|A Colorful History
Markets are correspondingly colored -- green for bull, and red for bear -- revealing their cycles
|Source: Barry Ritholtz|
Assuming we are, in fact, in a long, post-bull trading range, than this is year five (give or take) of what could be a 10- to-15 year secular bear market. As the 1966-82 experiences shows, we may be in for violent moves down and rapid blastoffs.
|Ups and Downs; Mostly Downs
The 1966-82 experience says we may be in for violent moves down and rapid blastoffs
|Source: Rydex Funds|
If we are repeating the 1966-82 experience, I'd say we are somewhere around 1972-73. The similarities are imperfect -- especially regarding interest rates -- but an unpopular war, a potentially scandal-ridden second-term president with low poll numbers, and the end of a 20-year bull run five years prior are too similar to ignore. Compare the numbers: the Dow is up 45% from its October 2002 low and the S&P by about 60%. That parallels the Dow's 67% gain from the 1970 low to the 1973 peak .
Four-Year Presidential CycleThe next chart reveals what is known as the four-year, or presidential, cycle. The theory behind this is that U.S. markets have a tendency to make a low in the second year of a president's term and a high in the fourth year. It has held up quite well historically, with the notable omission of 1986. Recall, however, what happened in 1987. The chart suggests that cyclicality is at play. Given the upward bias of markets over time, regular corrections of 20% or greater may be inevitable. What is truly astonishing is the very human propensity to downplay or even ignore these periodic dislocations. The classic example is the tendency of humans to build homes in earthquake zones, in flood plains, where tsunamis have previously hit -- even near volcanoes (!). Investors have similar blind spots.
|Hail to the Chief
The presidential cycle suggests trouble ahead
|Source: BTR Capital Managment|