The December blog was a tad gloomy, “Investing in The Age Of Radical Uncertainty”. To cheer you up before the close of January here is a blueprint for the (still to come) craziest bull market ever. Put together by a grey cautious optimist (me), aided and abetted by two even older analysts (the famous Grantham and Prechter), who are typically more cautious than optimistic.
Yes, it’s a strange story.
In early 1999 I wrote a report “Opportunity Knocks or Apocalypse Postponed? Probably both.” It wasn’t perfect by any means, but it captured the nature of what lay ahead for the FTSE 100 in the UK – a crazy new peak, followed by a series of very sharp downs and ups over a number of years. The look of the UK stock market in early 1998 is very similar to the Dow Jones in the US today, and that is very powerful information.
Our template for a complete stock market uptrend, a bull market, tells us to expect a notable correction towards the end, followed by the market rising to a final peak. Looking at the period before the millennium, the long bull run had begun in November 1987, and that correction occurred in Autumn of 1998, with the FTSE down 25% in a little over 2 months.
Such a notable correction has not yet occurred in the current bull run for the US stock market, which began in March 2009. In fact there hasn’t been a correction worthy of the name for years. My focus today is on the US stock market because this is the stock market which is already historically over-valued, and where the US goes, we will surely follow.
The picture in the US has a new clarity in recent months, as the market has accelerated upwards. In early 1998 such acceleration was the signal for the correction ahead – put simply, the market went too far too fast, just like, on a larger scale, in 1986/7.
Separately, in recent weeks two notably cautious long term analysts (Robert Prechter and Jeremy Grantham) came up with projections of around 34,000 (I am rounding) for the Dow, nearly 30% above todays level. Prechter dismissed his own calculation as ridiculous. Grantham on the other hand believes the complete upward trend from 2009 will not end until there is a melt-up, not a melt-down, based on his study of prior bubbles.
Let’s pull all of that together. A decent working assumption is that the notable correction ahead will fall into the Autumn window (as it has so often in the past). Bearing in mind liquidity issues in a range of markets (a lot of hot money will be trying to sell at once, and much of the selling will be by robots) assume a rapid fall of 25% from around 28,000 on the Dow, that is down to 21,000.
Next is the really interesting bit. A hugely profitable recovery from 21,000 towards 34,000 (up 62%).
This is not a prediction. Rather it is a possible road map based on the 1998-2000 precedent. It wouldn’t be a boring journey! We fully expect to have to adjust this road map as we go along. For now we simply recognise that an extraordinary bubble in the US stock market can inflate even more.
The action in the dominant US, for better or worse, would also be mirrored in other Western markets (in direction if not quantum), including the UK.
This blog is based on a larger report which you can access here. As ever, we love your feedback.