Harnessing the Boom and Bust Cycle
For starters, we've seen this before. Just about every forty years, in fact.
Sir John Templeton is credited with saying that the four most expensive words in the English language are, "this time it's different." The two most expensive words of the 21st century may end up being "new normal."
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Turn back the history book pages, and it's clear that we're not exactly in uncharted territory. Market technicians have been studying the 34-year boom and bust cycle for years, and sure enough Mr. Market looks like he's following a 34-to-40-year cycle pretty squarely right now.
Stocks fell out of favor back in the mid-to-late 1930s after the 1929 market crash scared investors away from stocks and the Great Depression put the country into the worst economic crisis of all time. The discount rate, incidentally, dropped to near where it is now in the years that followed, and stocks quadrupled in the decade after that. In the late 1970s, stocks fell out of favor again, prompting BusinessWeek's infamous "Death of Equities" cover in 1979. Stocks more than doubled by the decade after that, and more than tripled by the mid-1990s.
And now again, investors have been calling for the end of stock investing since the late 2000s -- even some really smart ones (though "new normal" espouser Bill Gross does admit to some "memory problems" in his October letter to investors). If history is any indication of what we should expect in stock performance over the next decade, Dow 55,000 isn't unrealistic, even if it seems far away.
Fundamentals Support More Upside
More important than the historical evidence alone, the market's current fundamentals support that sort of substantial rally too.
Right now, the Dow's average price-to-earnings ratio is 15.7. It was 16.2 in the last five years of the 1930s and just over 10 in the last five years of the 1970s. (For comparison, the high inflation of the 1970s warrants that P/E discount vs. the 1930s and now.) Corporate profits are sitting at all-time highs, corporate holdings of cash are sitting at all-time highs, and value is being returned to shareholders more quickly than in the last two decades.
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