In the 1933 movie “I’m no Angel,” Mae West famously said, “I used to be Snow White – but I drifted.” Some portfolio managers might need to say the same thing.
Long gone are the comparatively easy investment days of 1982 to 2000 when all you had to do was just buy and then hold through the occasional market downturn. Now, performance seems to be just drifting as everyone tries to figure out what to do.
Such is the nature of a secular (long term) bear market. That’s why, after all the dramatic ups and downs over the last 12 years, the market has basically gone nowhere.
Just when it looks like things are getting better, it rolls over; and just when it looks like everything is heading straight south, it starts back up again. Get used to it because this is not likely to change for a few years.
Long time readers know that I think we have been in a secular bear market since 2000 and probably have about another four to six years to go.
It has been my projection that the market would experience another correction this year and then a rally late in the year and into early 2013. That, of course, depends a lot on the upcoming election, what the Fed does or doesn’t do, the global economic slowdown and what happens in Europe.
After that I think we face the prospect of at least one more cyclical bear market and recovery before this secular bear market finally ends near the end of this decade.
That would follow the pattern of the last 100 years, in which secular bear markets lasted about 17 to 18 years. Long-term problems still remain that will require another washout to complete the recovery. Those problems mostly revolve around the massive government debt throughout most of Europe and in the U.S.
The good news is then we set the stage for the next 18-year secular bull market and unimaginable new market highs. You just need to be careful not to do too much damage to your portfolio in the meantime.
Mae West also said that “too much of a good thing is a good thing.” Not so with excesses in the financial world.
Bubbles happen when things go to extremes, and crashes wash out the excess as the bubbles burst. All bubbles eventually burst. It’s just a matter of when.
The 2000-2002 bear market resolved the last stock market bubble. The 2007-2009 recession resolved the housing and financial bubble created by the easy money policies that helped end the severe 2000-2001 recession. And now we’ll need one more burst to correct the debt bubble.
To combat the debt, economy-crippling austerity programs are already under way in much of Europe. They’re only in the beginning stage in the U.S., but I expect the cutbacks to become more intense after the election. How that is done will, of course, be the subject of intense political debate.
Over the last 110 years there have been 25 bear markets, or one an average of every 4.4 years. The current bull market has now been underway for 3.3 years. It will be 4.4 years old next summer, which will also be the beginning of the often negative first two years of the next Four-Year Presidential Cycle. Something to think about.
The stock market doesn’t seem to be worried though, and that’s why you should worry. Now we have global economies worsening, many already in the early stages of recessions, investor sentiment quite bullish and confident (usually a contrary indicator), and corporate insiders selling.
Government debt has reached record levels and governments are unable or unwilling to go further in debt to provide more fiscal stimulus. In fact, pressure is intense for them to begin cutting spending to lower debt.
The Fed and other central banks have pretty much used up all the monetary ammunition they had, putting out the fires in the summers of 2010 and 2011. They’re now trying to get as much mileage as possible from promises to come to the rescue without actually taking much action. The next few months will be quite interesting. For now, it looks like we’re still drifting.
Nick Massey is a columnist for The Edmond (Okla.) Sun. Contact him at www.nickmassey.com.