This report is in response to requests for our various capital market Supercycle forecasts and associated investment recommendations in light of recent market action, which has further confirmed all of them, including the currently all-important, incipient aftershock double double-dip in the U.S. business cycle.
See the first chart below of the Conference Board’s Coincident Economic Indicators Index as we uniquely adjust for population growth, which peaked in January, the four components of which the National Bureau of Economic Research primarily relies upon to date, with the increased certainty of hindsight, U.S. business cycle expansions and contractions. (We’ve explained previously where our more in-depth business work disagrees with their “official” recession declarations.)
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Following our various advance calls for the dot.com bust that started 11 years ago and the U.S. housing bust that started five years ago, the second and likely final downleg in the commodity/China bust that started in the summer of 2008 is now clearly underway. This follows our bullish call on China and simultaneous bearish call on Japan 22 years ago. See the second through the sixth charts below.
Continuing our repeated buy-again calls to buy Treasury notes and bonds over the past 30 years with the most recent one in mid-Dec, we remain firmly bullish and expect further Supercycle lows in both interest rates and eventually inflation during the K-Cycle’s downtrend (the combination of the Supercycle disinflationary Autumn and the ultimately deflationary Winter economic seasons). See the seventh through ninth charts below and the Supercycle Economic Seasons, associated asset classes and some of their key driving factors in the table at the bottom.
Although 10 to12 years ago we first became extremely long-term or Supercycle bearish on the U.S. dollar (bullisah on foreign currencies money markets) and bullish on precious metals, on May 1 for the RIA clients for which we are the investment strategist, we recommended the final partial-position sales to again realize profits in their client account investments in these asset classes. We expect to recommend re-establishing full portfolio allocations - again - in these asset classes, during the next several months.
Shorter term, keep in mind that the five- to six-month Weak Season in the stock market’s annual cycle – starting at the highest high in Mar, Apr or May – is finally clearly underway from the May 2 SPX high at 1371, and historically it has yielded net declines more than 90% of the time through the lowest low in Sep, Oct or Nov, as we’ve uniquely defined and reported before.
Also, despite the very popular notion that the stock market should be up this year because it has been up in all third years of the Presidential Election Cycle, which has only been true since 1943, seven of the nine (77%) such years during the previous two Supercycle Winter Periods ended their calendar years below their Feb or Mar highs (equivalent to the SPX Feb 18 high at 1344 this year): 1883, 1887 and 1895, and then again in 1931, 1939, 1943 and 1947. Since it’s a mean- reverting phenomenon, and because (rather than despite the fact) it did not occur four years ago in 2007 (like 1935), we also fully expect such a net decline through year-end to occur during this third current Supercycle Winter since 1881.
The mean-reversion, or statistical “catch down,” in this third election-cycle year is being driven in part by political events that will adversely impact the stock market. And this year there are plenty of domestic political and financial potholes: Senate gridlock within the split-house Congressional gridlock, gridlock between Congress and the Administration challenges to Obamacare, sharp conflicts over public union pensions and their collective bargaining rights, and especially the Gordian Knot of budget deficits at all levels of government, but most especially the federal deficit and its associated debt limit.
Interestingly, the last time there was Democratic President and Republican House, where financial bills must be initiated, was during 1859-60 and befittingly that was the end of a huge 26-year Supercycle Bear Market Period called The Great Debt Repudiation.
On a happier note, I’m pleased to announce we’re in the process of reinstituting our risk-adjusted relative-strength stock selection service started 44 years ago, which tentatively will be called Proprietary Alpha (PA). See the attached copy of our July 20, 1973 report illustrating and explaining the ten-stock model portfolio’s 20+-fold gain in less than eight years, and Modern Portfolio Theory’s alpha-beta upon which we developed our original black-box formula for selecting stocks.
Our PA is based upon multi-decade data, re-optimized for various-sized model portfolios, to take the most profitable advantage of the coming Supercycle Bull Market Period (Supercycle Spring) that we continue to expect will start just before the mid-term Congressional election in Nov. 2014.
We currently expect that during that ~16-year reflationary economic Supercycle Spring, the U.S. stock market will triple every eight years – if not double every five years – on a total return basis, with the Dow reaching 50,000, if not 100,000 by 2030. Of course, I would love to be working during all of next 19 years, but in any case we are putting business succession plans in place.
1. Over many years we’ve documented our discussions with others who have used the terms K-Cycle, Kwave, Kondratieff (Kondratiev) Wave or longwave with Season(s), and the like. Our decades-long publishing record clearly establishes that we were the first to use these terms with Season(s), as well as the first to quantify them economically and otherwise fundamentally (Kondratieff and Schumpeter did not) and even technically. Most importantly, we were also the first to forecast their applicability to the secular period dating variously from the late 1990’s through March 2000, depending on the metric under consideration - see As Forecasted – A 12-Year Retrospective We more than welcome further inquires.
2. The Supercycle Summer and, especially, the Supercycle Winter have only a fraction of the economic growth of the Supercycle Spring and Autumn due to the increased severity (magnitude and times duration) of recessions, or more accurately, business-cycle contractions during Summer and Winter.
3. The terms “more“ and “less” refers to the combination of cyclical frequency and severity (duration times magnitude) – see SMECT: A Forecasting Model That Integrates Multiple Business and Stock Market Cycles Since 1896
4. The terms ““bull” and “bear” refer to the over- and under-performance in Supercycle (secular) trends of excess total return compared to the risk-free return and other asset classes.
5. P/E includes quantification of investor mood (animal spirits) – see our earnings-capitalization stock-market valuation model: Quantifying and Forecasting an Equity Risk Factor
6. See our severity (magnitude and duration) quantification of the 33 most severe bear markets since 1895: Exhibit E in #3 above.
7. Here’s a link to our report Sell Commodity Indices,which demonstrates that commodity price indexes, like the CRB, are much more inversely correlated to the trend rather than the absolute level in real (inflation-adjusted) short term interest rates. Precious metals, especially gold, are more responsive to trends in the U.S. dollar, and the most economically important commodity, oil, which is still primarily priced in the U.S. dollar, is also very reactive to global political events.
