We're Trapped in a Market Going Nowhere Fast

Tired of the market's volatile swings? Sorry, but you need to get used to it.

For the next dozen years or so, the broad U.S. stock market will seem to be on a wild roller-coaster ride. The Dow Jones Industrial Average and the S&P 500 index will go up and down, often wildly, and in the process set more all-time highs and multi-year lows. But they will also be stagnant, trading in range without making much progress.

At some point during this ride, index investors and buy-and-hold stock collectors will realize that their portfolios aren’t showing much of a return.

I know this prediction has a sci-fi feel to it. After all, how could I possibly know what the market will do, especially that far into the future?

Well. I explain in great detail in a presentation you can download (.pdf file) why I have the audacity to make this prediction. But first let me offer you a little factoid: over the last 200 years, almost every full-blown, long-lasting secular bull market -- and we had had a supersized one from 1982 to 2000 -- was followed by a range-bound market that lasted at least 15 years. This happened every time, with the exception of the Great Depression, over the last two centuries.

We tend to think about market cycles in binary terms -- bull (rising) or bear (declining). But in the long run, markets spend a lot more time in bull or range-bound (sideways) states, roughly half in each, and visit the bear cage a lot less often then we think. This distinction between bear and range-bound markets is extremely important, as you need to invest very differently in one versus the other.

And while the global economy is doing “less bad” these days, and maybe even recovering, the secular range-bound market that started in 2000 is still marching on.

I’ve studied market cycles (and range-bound markets) for my book Active Value Investing: Making Money in Range-Bound Markets (Wiley, 2007), and I've just updated the data and answered some questions readers have asked. I put it together in a presentation/speech that basically qualifies as a second edition of the first part of the book, explaining why I think we are likely suffering through a range-bound market.

That's the presentation I'm offering to readers as a free .pdf download; click here to read it.

I should to warn you that this .pdf is 20 pages long. However, a lot of space is consumed by charts and tables, so don’t let the size scare you. Kill some trees, don’t kill your eyes – print it. I hope you enjoy this, and more importantly find it beneficial. You are welcome to share it with your friends (and enemies).

Comments

[christophe:]

Thank you for this Vitaliy. Very interesting and relatively easy read.

Aug 23 10:28 AM

[untrusting ...:]

A very good presentation and summary in your 20-page article. Would agree with most if not all of your concepts. It certainly seems that we will be in a trading range for quite some time now. Not the easiest thing in the world to profitably trade the range, but probably a lot better to attempt to do that, than sit there for years and effectively earn very little on any investments or even worse lose money on holding investments.

Aug 23 09:00 PM

[Richard Dwyer:]

Don't forget that the economy may tank while stock prices rise nominally (not in real terms) due to inflation. Inflation creates an upward price bias as our stock market is denominated in dollars.

Aug 23 11:30 PM

[Student of ...:]

"I was glad that eggs were not served at lunch or dinner while I was presenting, as for sure they would have been thrown at me..."

Not by me, I don't kill the messenger when I'm given bad news. The 20 page presentation was a very good read. You tell it how you think it is...

Sep 09 10:20 PM