Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
How to Play Interest Rates in US Real Estate - 20th Aug 19
Stocks Likely to Breakout Instead of Gold - 20th Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 20th Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 20th Aug 19
Holiday Nightmares - Your Caravan is Missing! - 20th Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Dow Jones Stocks Bear Market 2,000 Target By Elliott Wave Disciple Prechter

Stock-Markets / Stocks Bear Market May 19, 2009 - 01:53 PM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: In February 1995, the U.S. economy was in great shape. The 1990-92 recession had been over for a couple of years, the Federal Reserve was beginning to ease interest rates, the Clinton administration was beginning to make progress on sorting out the United States' modest long-term budget problem and there was this new thing called the Internet that looked as though it might bring some exciting new possibilities.


The stock market, too, was strong, with the Dow Jones Industrial Average broke through the 4,000-point level on Feb. 23, 1995, putting it almost 50% above the bull-market high of September 1987.

That level of 4,000 is equivalent to about 7,800 today, when you inflate it by the growth in nominal gross domestic product (GDP) in the intervening 14 years. In other words, if things were looking as good as they were in February 1995, and the market was moderately bullish as it was then, you'd expect the Dow to be around 7,800.

The Dow surged 2.85% yesterday (Monday), to close at 8,504. But the economic conditions we're looking at today are nowhere near as strong as they were back in the spring of 1995. And that paints a somewhat bleak picture of where the U.S. stock market may be headed.

To get the ultimate doom-laden view, I talked last week with Robert Prechter, who for 30 years has run an investment company based on the Elliott Wave Theory, propounded in 1948 by Ralph Nelson Elliott. I'd wanted to meet Prechter ever since I had seen ads he ran in Barron's back in the bear market days of 1981-82. The Dow was around 800 at that time, and he forecasted that the U.S. stock market was about to enter a huge uptrend, which might last as long as 20 years, and for which 3,000 on the Dow was only the first stage.

"Boy, he's bullish," I remember thinking - it was considered bold at that stage to forecast a Dow of 1,200, which would have been 15% above the index's all-time peak set in 1972.

But Prechter was right.

He was also right in 1987, when he predicted the sharp bull market of that year would end, but that the pullback would be only a temporary problem before the market went on to greater things.

In the late 1990s, Prechter turned bearish, explaining that the "fifth wave" of an Elliott Wave cycle - and therefore the bull market - was coming to an end. He was a few years early, but by following his advice after about 1998 you would have avoided a decade in which your money made an all-in return of approximately zero.

He was still bearish in 2003 - as was I. In cash terms, we were both wrong and went on being wrong for the next four years, as the Dow zoomed from 8,000 to around 14,000. Of course, as he pointed out to me last week, if you accounted in gold, stocks had in fact declined somewhat between 2003 and 2007. It's not the Elliott Wave system's fault that the denominator in the equation - the U.S. dollar - fell out of bed through excessive money printing.

Prechter even managed to call this year's March bottom, expecting a substantial bear market rally at around 6,300 on the Dow, close to the bottom. However, he expects the market to resume its downward trend shortly, ending with a decline similar to the 86% in real terms of 1929-32 as we are in a long Elliott Wave downswing. That would take the Dow down to around 2,000.

Personally, I would not go that far. This does not look like a reprise of the Great Depression, although it could still turn into one with enough policy mistakes - another "stimulus plan," or a big dose of protectionism, for example. However, the downward macroeconomic momentum looks bigger than in either 1974 or 1982, bear markets that both brought real-term drops of slightly more than 50% from previous highs.

The current crisis more closely resembles the British crisis of 1972-75, which caused a drop of 72% from the high, or the Japanese crisis after 1990, which brought a drop of 70% within three years, and led to a long-term bear market that has left that market in its current doldrums, about 80% below its peak. For us to see a similar 70% decline from the Dow high, we'd have to be looking at an index that had fallen all the way down to about 4,400. At that point, it would about as cheap as after the 1987 crash, though still not as cheap as it was in 1982, before the great bull market began.

Bulls will respond that corporate earnings are still above the levels appropriate for a 4,400 Dow, to which I would respond that profits might have further to fall. So far, we have seen only a collapse of financial sector earnings, while non-financial earnings remain close to their 2007 highs, when GDP was also at record highs. A period of higher corporate taxes and slow growth - coupled with consumer spending that's low because U.S. consumers need to save, rebuild their asset base, and pay down their debts - could well cause a further period of earnings deflation, which would return corporate profits to their historical average percentage of GDP - if not to an even lower point.

Where Prechter and I differ is on inflation. He sees a further collapse of asset prices and debt values, with consumer debt and commercial real estate wreaking more havoc on bank balance sheets. That could cause massive price deflation, and a decline - rather than an increase - in the price of gold.

Personally, I look at the over-expansive monetary policy pursued by the Fed for a decade now, and its continuance, and see inflation ahead. Inflation would also help Uncle Sam finance those deficits, so it seems more likely than not.

That difference in opinion aside, Prechter was both charming and fascinating. Maybe we can combine our views, and agree that the deflation will be of the dollar's value, so that prices will inflate in dollar terms, but deflate in such other hard currencies as the euro, the renminbi (China's yuan), or the Brazilian real. We shall see.

The bottom line: While the market could go up a little further in the short term, it's not the time to get aggressive.

[Editor's Note: When Slate magazine recently set out to identify the stock-market guru who most correctly predicted the stock-market decline that accompanied the current financial crisis, the respected online publication concluded it was Martin Hutchinson, a veteran international investment banker who is one of Money Morning's top forecasters.

It was no surprise to our readers: After all, Hutchinson warned investors about the evils of credit default swaps six months before the complex derivatives did in insurer American International Group Inc. Then, last fall, Hutchinson "called" the market bottom.

Now Hutchinson has developed a strategy for investors to invest their way to "Permanent Wealth" using high-yielding dividend stocks. This strategy is tailor-made for an unpredictable stock market that's backdropped by an uncertain economy. Just click here to find out about this strategy - or Hutchinson's new service, The Permeanent Wealth Invesor.]

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules