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Kass: Sustained Market Advance Unlikely

This blog post originally appeared on RealMoney Silver on Oct. 15 at 8:46 a.m. EDT.

Over the course of the last six to 12 months, I have had an ongoing dialogue with three individuals who know a lot more than me about the economy and the stock markets. All three, at one time or another, were the top-ranked strategists on Wall Street. To be honest, their collective grasp of the economy and the markets well exceeds almost any market observer extant.

I think they enjoy our dialogues and converse frequently with me, mainly because I provide a reasonably thoughtful and devil's advocate view. And I certainly respect their views and even their guidance, at times.

All three have been bullish over the course of the last two years, though one has recently become a convert to the dark side.

In essence, their collective view is that the domestic economic recession will be mild by historic standards:
  • The Treasury plan will remedy and ultimately reverse the credit crisis.
  • A second fiscal package is being framed and will provide a catalyst to growth.
  • The Fed will continue to be a friend of the markets.
  • A moratorium on home foreclosures will kick-start housing.
  • Today's share prices discount a more-severe-than-average recession.
From here, the path of least resistance that they surmise for the stock market is up as a several-year period of below trendline economic growth will still produce modest profits but tamer inflation. When the credit crisis ends, they surmise, the world's economy will be more balanced, setting the stage for total returns from common stocks on the order of up 6% to 7%; although lower than historic returns of up 9% to 10%, these are compelling returns nonetheless relative to historically low interest rates and modest inflation.

While I believe that the market has likely hit its lows for the, the purpose of this column is to counter the economic argument of my esteemed friends, which I (naturally) believe to be currently more persuasive.
  1. A sustained market advance appears unlikely.
  2. The next several years will provide substantially subpar investment returns.
Jolts and dislocations are the order of the day.
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