Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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