Updated: May 3, 2013 12:14PM
Originally published: August 12, 2004
As regular readers of this column know, I view stock market investments in the very long term -- at least 20 years. That view is based on the fact that there has never been a 20-year period since 1926 where an investor would have lost money in a diversified portfolio of large company stocks, with dividends reinvested.
That long-term investment commitment doesn’t keep me from buying and selling individual stocks on occasion. And it doesn’t diminish my fascination with stock market gyrations or those market forecasters who use all sorts of techniques to forecast the trends.
Over the years, I’ve had a chance to sort out the serious forecasters from the headline-making charlatans. So when two of my longtime favorites recently came up with the case for a serious market decline, I thought I’d share their viewpoints with you.
The first is Bert Dohmen, who has been writing the Wellington Letter for the past 37 years (www.DohmenCapital.com). He’s a serious observer of the political economy, as well as the markets, and his fascinating newsletter doesn’t hesitate to take on the Fed or suggest selling stocks, or selling short.
When we talked last weekend after I read his latest, bearish newsletter, Dohmen pointed out that the degree of optimism among investment advisers and Wall Street analysts is currently similar to what was seen at the market top in 2000. Here’s his view:
“As we have been pointing out since early this year, the ‘best of all worlds’ consisted of:
*Very loose monetary policy by the Fed.
*Huge liquidity injection by the leading central banks of the world (especially the U.S. Fed).
*Huge liquidity creation by the central banks of China and Japan buying U.S. dollars (as they purchase U.S. Treasury debt).
*Huge liquidity creation (over $1 trillion) through refinancing mortgages.
*Significant tax cuts.
“All that is now grinding to a halt. We saw what was probably the most powerful confluence of liquidity creation in modern history. That is why the tremendous stock market crash of 2000-2002 didn’t produce a severe recession.
“That ‘best of all worlds’ got the major indices to their highs earlier this year. Obviously, a contraction of all those goodies will require a downward adjustment in stock prices, and possibly a significant one. It’s that simple!”
We talked again after Tuesday’s big rally, ironically sparked by the Fed rate hike. Had the 130-point rally changed Dohmen’s outlook?
“If anything, [the rally] reconfirms it. Tuesday’s volume was pathetic. This means that there are no big buyers out there. Why should there be, when lower prices can probably be gotten in a couple of months?”
But Dohmen’s bearish views are nothing compared to those of economic historian Donald Hoppe, who for many years wrote a well respected newsletter called the Kondratieff Wave Analyst (Kondratieff was a Russian economist in the early 20th century who postulated that the economy moved in a series of regular cycles).
Hoppe and other serious scholars have done some intense work on this cycle theory, predicting the peak in inflation and commodity prices in 1980. I guess my own timing was right when I picked up the phone to call Hoppe last week, just to see what he’s thinking about the market. I got an earful!
New market low coming
Hoppe is now predicting a new stock market low -- below the October 2002 low of 7,368 on the Dow -- a low he says should be made around year-end or early next year. That major cyclical low will coincide with the 181/3-year stock market cycle, which last bottomed -- you guessed it -- in October 1987!
And if all that doesn’t make you shiver, there’s the old presidential election stock market cycle, which says that those who buy stocks the day after a presidential election, and hold for two years, have a distinctively lower return than those who buy at mid-term and sell on the eve of a presidential election.
My goodness. With all that bearish advice from economic forecasters, cycle scholars and even pop culture theories, it’s enough to make you a contrarian and think about buying.
Or at least, to stop thinking about timing the market, and just keep on investing that $200 a month in an index fund on a regular basis and see what happens in 20 years. It’s worked so far. And that’s The Savage Truth.
Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast. Distributed by Creators Syndicate.