Let The 70's Be Your Guide; The Current Correction

Nov. 05, 2009 8:21 AM ET
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Contributor Since 2009

Fred S. Fraenkel, Beacon Trust Company - Vice Chairman of the Board of Directors, - Chairman of the Investment Policy Committee - Chairman of Millennium 3 Capital Venture Fund - Vice Chairman and COO of ING Barings Furman Selz - Managing Director and Director of Global Research at Lehman Brothers Inc. - Board of Directors and Director of Research at Prudential Securities - Five Years Barron’s Year End Rountable - Chief Investment Strategist EF Hutton - Bank Analyst Goldman Sachs - University of Pennsylvania - Wharton School, M.B.A. - Lehigh University, B.S. – Beta Gamma Sigma, Omicron Delta Epsilon

By Far  the best call I made this year happened on Feburary 24th.   You can read it on my blog:  beaconcommentary .com.  It was entitled  1974 Redux the coming rally;  Post Apocalyptic Walk.”    I explained that I had started in the business during the mid-70’s recession and that despite extreme pessimism, driven by systemic problems, the market had managed to forecast the recovery coming in 1976 early in 1975.  I ended the piece stating:

Don’t expect to figure out exactly when the market will bottom, or when it will rally 50% off of that bottom.  I sure didn’t at Christmas time in 1974, and I don’t expect to be able to figure it out during the Spring of 2009 either.”

The bottom line is my 70’s experience gave me the courage to extrapolate a similar outcome in 2009.  Having had this success, it is somewhat natural for me to take a closer look at what happened later in 1975 to reference the market correction that we are having.

In 1970’s the market bottomed late in 1974 and hit a short-term peak in July of 1975, seven months later.  This time around stock markets bottomed in March of 2009 and hit what may be a short-term peak late in October.  In the 1970’s the Dow had rallied about 53%.  In 2009 the Dow has rallied about 54%. 

Two and one and half months later the Dow was down about 11% in the 1970’s.  Three months later it was just about back to its previous peak.  One year after that on 12/31/1976 the Dow was again over 1000 a full 75% rally off the December 1974 low. 

Will things turn out exactly the same this time?  Who knows?  I certainly don’t know why things would work out exactly the same.  The problems are different this time.  The political backdrop is different.  We are most likely at the end of a long cycle of disinflation right now rather than getting to the end of  a long inflation cycle like we were in the 1970’s.  However, the one thing that could be similar is that we are most likely beginning a new business cycle after a brutal recession.   If that is the most important factor than the markets might act in a similar regard.

If our markets today mimic the path of the mid-70’s market we might have a correction that would take us to around 9000 over the next few months and then back to 10,000 a few months later and by March 2011 we could be at a Dow of 11,500.

This doesn’t in any way negate or change the advice we have been giving  to our clients. 

Buy corrections:  Trying to sell out to avoid corrections and then buy back in, in time for the following rally…..is a loser’s game. 

Look for ways to invest in the rapid growth outside of the United States:   Many companies in the United States are quickly figuring out how to view their customers as one large world market.  Many companies outside the United States will experience rapid growth for the next few decades.

Keep your bond maturities rather short:   In our opinion the odds of interest rates staying low for the next ten years is very small indeed.  You need to forgo some extra interest now to be able to take advantage of substantially higher interest rates coming in the next several years.  

Things may not turn out exactly like they did in the 1970’s in the stock market, however, after watching the market cycles from the mid-1970’s through the current one;   it’s the best guide I have and gives me confidence that investors can stay the course and repair their personal net worth’s. 

Fred Fraenkel

Vice Chairman and

Chairman of Investment Policy

Beacon Trust Company

Copyright (c) BEACON TRUST COMPANY  2009. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. This report  is  issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold a company’s stock. Predictions, forecasts, estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained are proprietary to Beacon Trust Company. and constitute valuable intellectual property. No material from this report may be used or otherwise disseminated in any form to any person or entity, without the explicit written consent of Beacon Trust Company.  All unauthorized reproduction or other use of material from Beacon Trust Company shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Beacon Trust Company expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Beacon Trust Company reserves the right, without further notice, to pursue to the fullest

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