The first half of 2011 is now in the rear vision mirror so it may be a good time to revisit some predictions laid out earlier in the year and see how they stack up. Here is what I said at the beginning of the year:
I don’t doubt we could get a 14 handle on the S&P500 sometime in 2011, I would suspect we will have a good market for the first half of the year but run into trouble in the second half. I’m looking for low to mid single digit gains for the year which will be disappointing for most.
We came close to a 14 handle in early May with the S&P500 hitting 1370 intra-day. The recent bounce into late June early July could take us back to those levels and perhaps 1400. Whether the S&P500 gets to 1400 this year is not important to my medium term outlook. I continue to believe we are in a cyclical bull market within a secular bear market. The history of cyclical bulls within secular bears suggests the current bull is getting long in the tooth. In terms of both duration and percentage gain this cyclical bull within a secular bear market is longer than average and has gained more than average.
Admittedly 12 data points is not a huge sample size to go on but it is worth noting that only 3 of the 12 bull markets in the table above were of longer duration than the current one. Also, the average is skewed somewhat thanks to the 2002 – 2007 bull market. Of course that bull market was characterized by unusually low interest rates for an extended period, sound familiar? Still, my view is that a bear market will happen sometime in the next 12 months quite possibly presaging another recession. If not and the market grinds higher, prospective long term returns in the 7 – 10 year time horizon will be mediocre, at best, given the level of overvaluation that already exists in the market today.