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What Will The Market Do Next?

“The only new thing in the world is the history you do not know.”  -Harry S. Truman

Do me a favor…take out a photograph of two or more people, and tell me what day of the week the photograph was taken.  Unless there are some obvious clues, I’d bet you’d have a hard time figuring that out.  Now look at the photograph again and tell me the approximate age of the people in the photograph.  Even though you probably know the people in the picture, I bet you could still have guessed their approximate age (within 10 years or so) even if you didn’t know them.  There’s simply more room for error compared to trying to guess the exact day of the week.

Market forecasting works the same way.  Did you know that over the short-run, the market goes up and down with about the same frequency?  That’s why half the folks on the news today are probably wrong.  Like trying to identify the day of the week in the photograph, the short-term cycles (aka “cyclical” markets) are just too difficult to predict and require too much precision.  However, long-term market cycles (aka “secular” markets) have inherently longer time frames, which makes them much easier to identify.  Since long-term bull market cycles can last up to 25 years, and long-term bear market cycles can last almost 10 years, you can begin to form a reasonable opinion about where the market is at any given point.

Yet there’s one significant problem, which brings us to the point of this article.  A great hindrance to becoming a successful informed investor is confusing a short-term “cyclical” bear market for a long-term “secular” bear market.  Take 1987 for example.  The market dipped 34% that fall, and yet it earned 2% for the entire year.  That’s a perfect example of a short-term “cyclical” bear market recovering quickly during a long-term “secular” bull market (1975-2000).  If the Dow went from 632 points in 1975 to 11,722 points in 2000, wouldn’t you want to ignore a 34% dip in the meantime?  The reverse can also be true.  If that same market goes from 11,722 in 2000 down to 6,507 in early 2009, wouldn’t you want to be financially and emotionally prepared for the market to lose ground for almost a decade?

Going back to the Great Depression, the 1930s were essentially a long-term bear market.  What followed was a period where the market performed fairly well from 1940-1965.  After struggling from 1966-1975, the next long-term bull market lasted from 1975-2000.  Do you see a pattern here?  The last long-term secular bear market lasted from 2000 to early 2009, and so we’re about 10 years into this next long-term secular bull market.  There’s no guarantee this one will last 25 years, but I’d recommend basing your investment philosophy on longer-term market cycles that are much easier to predict instead of what someone says on the “news.”  Are you confused as to why the market has quadrupled over the last 10 years?  Don’t be.  After all, the only “new” thing out there is probably something that’s already happened before.

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