Market Outlook: Expect a Replay of 1965-82

At the risk of sounding simplistic, markets are complex. When we combine ownership positions in different operating companies, fiscal and monetary policies that alter the path of the economy, and the never-ending rollercoaster of investors’ emotions, price movements often take on a life of their own. Investors who follow the daily swings are left questioning what factors affected the past and how they will influence the future.

Often, this is a fool’s game. We can never know the true driver of illogical price movements and are better served allocating our time to broad themes. From a high level, three main factors affect stock prices—the macro environment (predominately the economy and interest rates), company fundamentals, and investor emotions (shown through technical analysis).

Focusing on the first item, the current macro environment is mixed. The economy, while rebounding, still remains well below trend. For example, housing starts are expected to reach 600,000 this month. This is well above the low of 479,000 reached in April and has the bulls declaring the housing rebound has begun, but the bulls are getting ahead of themselves. If we examine housing starts back to 1959 we see them bottoming near 800,000 in every previous recession. It will take a 33% increase just to return to previous bottoms. Many other economic indicators are sending a similar message. The path is now higher, but we have years to go before returning to normal.

As for fundamentals, stocks are not cheap these days. With a large rally off the March lows, investors have priced in a massive recovery in corporate profits. Again, this may come, but it will be years in the making.

With two of the three factors offering little support to stocks, we turn to investor emotions. On this front, the data is euphoric. Prices remain strong with investors buying every dip and enjoying the quick profits that materialize. Eventually, optimism will run too far, the rally will stall, and the market will revert to the downside. However, those days remain well into the future.

On a multi-year forecast, I continue believing we are in a generational trading range which will mimic 1965–1982. On September 17, 1965, the Dow Jones Industrial Average (Dow) closed at 929. On September 15, 1982, it closed at 930. During that 18-year period, the Dow moved cumulatively by one point. However, the broad measure does not capture the volatility that occurred. On 49 different occasions, prices swung more than 10% in short time periods. While a buy-and-hold investor made nothing in nominal terms, and suffered enormous inflation-adjusted losses, the astute trader made a killing.

Expecting a repeat of this experience for the next 15 years, we must be alert to swings in the market and where the trend is taking us. By positioning correctly, we can accrue the gains a choppy market offers and outperform those who are buying for the long haul. For now, prices are heading due north. I maintain an interim price target on the Dow of 10,500 and do not expect a significant correction until this level is bettered. Until the market peaks, weakness is to be bought as investor emotion dominates and prices move higher.

Comments

[bbro:]

We are cheap to GDP (as long a we stay in a low inflation environment).....we are not going to see a repeat of the last
decade....that is yesterday's news......

Sep 17 06:04 AM

[chap08:]

The 65-82 period is probably not a bad blueprint for what's to come. There are long lists of similarities and differences between that period and now, but the main point is the "stop, start" nature of the market. This will be driven by the injection/withdrawal of stimulus spending and spikes in the oil price when ever the global economy gets moving. A similar pattern has occurred in Japan during the lost "decade". This, as you say, provides plenty of profit (and loss) making opportunities.

The other key similarity with that period is that some commodities will provide even better opportunities.

Sep 17 06:07 AM

[Puck:]

Interest rates are at zero. Anyone who has a productive use for money can get it.
The Macro Economy is weak. We are still losing jobs, over 20 months in a row.
Company Fundamentals are trash.
Investor emotion is psychotic and manic-depressive.

Hey, one out of four ain't bad!

Sep 17 06:56 AM

[Pianobrad:]

1965-82 is the correct analogy, but the beginning of the current reiteration of that bear market was 2001, not 2007. It's thus more likely that that we're about halfway through it.

Sep 17 07:41 AM

[Michael Clark:]

2001-2019.

The previous Night-Cycle was 1965-1983.
The previous Night-Cycle was 1929-1947.

Sep 17 07:45 AM

[enigmaman:]

YOU SAID
"Prices remain strong with investors buying every dip and enjoying the quick profits that materialize. Eventually, optimism will run too far, the rally will stall, and the market will revert to the downside. However, those days remain well into the future."

Prices are not strong, momentum is strong,
Investors are not buying every dip, traders are
Quick profits are only realized when taken
Optimism has nothing to do with this market, this rally is being gamed and milked, without an outside event it will end when the cow is dry
Nobody knows when this will end today or as you say "well into the future"

YOU SAID
For now, prices are heading due north. I maintain an interim price target on the Dow of 10,500 and do not expect a significant correction until this level is bettered. Until the market peaks, weakness is to be bought as investor emotion dominates and prices move higher.

Blah Blah Blah, generalization not backed up by any technicals, How about Stocks will go higher until they stop
Investor emotions have had nothing to do with this rally, its methodical, calculated, volume shows lack of emotions

Sep 17 08:13 AM

[Living4Divi...:]

The inflation / stagflation of 70's was caused by external oil price shocks.

The potential for a repeat of 65-82 certainly exists. This was a bad era for both stocks and bonds.

Let's hope that history doesn't repeat itself.

Sep 17 08:16 AM

[CC_Gold:]

This was a good article because it made me think. Your comparison from 1965 to 1982 is correct when you divide the USD index against the DOW/S&P. Now if you divide Gold against the DOW/S&P during that same time frame, you will clearly see 1925 to 1939. It is the classic tale of two cities.

Sep 17 08:21 AM

[Badgolfer:]

Your analysis has good groundings.A smarter man one said:"Those who ignore history are doomed to repeat it."
One criticism.Your use of the word "normal" should be in quotation marks in this instance.

CW

Sep 17 10:02 AM

[cyclingscholar:]

Well done and well argued. This has been a point mde by briefing.com also. To me the key is the deficit as a % of GDP. To reduce it., we must

(1) reduce spending
(2) raise taxes or
(3) print money.


All three are burdensome on the markets. Cost cutting technology companies might be an exception and salvation to this scenario: medical technologies, biotech, nanotech, etc.

Sep 17 03:48 PM