Market: Room to Run
From Dorsey Wright & Associates:
History Does Not Always Repeat, but It Does Seem to Rhyme with the Early 1950’s
As market technicians we often use history as a guide to understanding current market environments. Two years-ago when we wrote our “SPX 2000 – The Next Great Equity Rally” report we drew comparisons with the latter stages of the 1970’s bear market and start of a new secular bull market (at that point unconfirmed as the SPX was still below its ’00 and ’07 highs). However, while the comparison with the late 1970’s was good, we now believe a better comparison is with the early 1950’s. First, in both periods, the U.S. economy was just starting to emerge from an extended period of weakness. As you can see in the chart below, the broader market has been in a secular consolidation range for more than 10 years. Second, similarly to the bear market in the 1940’s, the bear market that began in 2000 had two well-defined peaks before breaking out to new highs. Third, interest rates in the U.S. in the 1940-1950 period were near historic lows (similar to today). Thus, based on history, we believe the broader market has now entered the early stages of a secular bull market that we believe still has a lot of room to run. In prior secular bull markets, investors made five times their money from 1952 through the mid-1960’s and fifteen times their money from 1982 through 1999.
Click to Enlarge
While there is no need to commit to a static allocation that counts on the parallel to the 1950’s continuing and resulting in another decade+ of strong equity returns, I do think the comparison is plausible. At a minimum, investors should invest in strategies that give them the opportunity to participate in secular bull markets. After all, part of risk management is managing (participating) on the upside. Frequent conversations with financial advisors confirm to me that there are many that remain focused on mitigating losses when “the other shoe drops.” The psychological damage inflicted on investors in the last two bear markets has left many seemingly unable to see anything but risk.