Laslo Birinyi, founder of Birinyi Associates Inc., first made a call in December 2012 that S&P 500 would reach the 1600 level in 2013. Once his prediction came true in May, he made a bold prediction that S&P 500 could reach 1900 in 2013!
Specifically, Mr. Birinyi sees historical parallels between the markets of 1982, 1990 and 2013. Thus, based on the YTD performance of S&P 500 (SPY), a simple extrapolation of the chart based on the patterns of 1982 and 1990 puts S&P 500 at over 1900 by the year-end.
We disagree. Fundamentally, the markets of 1982 and 1990 are very different from the market of 2013. Yes, the stock market was flat for over 15 years in nominal terms before breaking out in 1982, just like the market has been flat for over 13 years before reaching the all-time highs in 2013. But, the breakout in 1982 was fundamentally justified. Now, it is very difficult to fundamentally justify the beginning of a new long-term bull cycle.
Specifically, the market was flat in the 1960s and 1970s primarily due to the inflationary pressures, which abated during early 1980s, at which point the interest rates commenced a long-term downward trend. Falling interest rates provided a fundamental boost for the stock market for a long-period of time.
The inflationary pressures abated primarily due to the new globalization policies of the "Washington consensus", which triggered the new wave of globalization - outsourcing manufacturing to the emerging markets. Further, Reaganomics provided significant boost to economy with the introduction of the policies of budget deficits and lower taxes to stimulate the economy. Geopolitically, the Reagan Administration led to the fall of Soviet Union, which opened the new markets for capitalism. Business-wise, during the 1980s and especially the 1990s, the information technology revolution transformed the global business.
Now, in 2013, the interest rates are near all-time lows, due to the deflationary pressures. Deflation is mostly a bi-product of the globalization policies that started in early 1980s - the ability to produce high supply of goods in emerging market at cheap prices, beyond the consumer needs (or demand). Further, the policies of budget deficits and low taxes of early 1980s are now changing to the austerity and higher taxes as many country defaulted due to unsustainable deficits, such as Greece. Geopolitically, the World is becoming a bi-polar again with emergence of China, while significant power rests with oil producers in volatile regions.
So, fundamentally, what are the positives for next 10 years? Why should we be buying this long-term break out in stocks?
In our opinion, the market (DIA) (QQQ) is still trading off the expiring themes of early 1980s, which are now only causing problems - deflation, geopolitics, and budget deficits. The Fed and other central banks are fighting these problems by artificially supporting the stock market, and perhaps suppressing the gold prices (GLD). So, yes, Birinyi can be right and the market can reach 1900 by year end, but it's not a rally based on the fundamentals. Thus, we are cautioning investors not to engage in trend-following or positive feedback investing, and to stay diversified in assets such as gold .
We welcome comments from the readers telling us what longer-term fundamental reasons for this rally we are potentially missing, in parallels to 1982 and 1990.