In spite of my generally positive view of the world stock markets since 2003, and my last time out comments on the long term A/D line, I feel there is some increased probability of a stock market correction in the second half of 2007.
If we look at US economic indicators of output, corporate and personal earnings, etc., we see that the slowdown of the past year or more may be ending for a while. In other words we could be seeing the beginning of greater real GNP year over year growth. A quick and easy way to look at the US numbers is at Martin Capital's economic section: http://www.martincapital.com/main/econ_cyc.htm
On the other hand it is becoming evident to the FED and the markets that inflation is becoming imbedded and priced into corporate and into individual's expectations. If you've read my Kondratieff Wave posts over the years you'll know that this is no surprise to me. But now we are reading analyses by quite a few market analysts and economists who have never heard of Kondratieff about structural lags in the delivery of highly demanded crude goods of all sorts. This is of course what the Kondrateiff Wave is largely about: a long term cycle of over and under supply. This is due to longer term gradual obsolescence and non-replacement of supply sources for several decades (1980-2003). Then follows several decades of rebuilding or expanding supply sources to meet demand. The planning, financing, building, and roll-out of these facilities isn't done fast enough--realistically can't be done fast enough--to satisfy demand for quite a long time.
We all know how petroleum refinery output has lagged demand in the US, but we see a similar situation worldwide, even recently in Iran which is a net crude oil exporter. But similar bottlenecks or infra-structure scarcity exists in the mining of many kinds, in forestry, in power generation and trasmission, in roads, in water supplies, in foodstuffs.
The tendency often is to blame politicians or environmentalists for these shortages, and they doubtless exacerbate the extent of the shortages. But the overriding issue is a global macro shortage of modern and adequate supply infra-structure. For example, crude oil prices would be rising regardless of the merit of the "peak oil" debate. And so would wheat and copper prices.
I have written about the problem for corporations and individuals and equity markets when rising interest rates get "too high", as happened in the mid 1960's. But the same is true for crude goods prices and their extension or embedding into finished goods prices and the prices of services. This is what the FED has been alluding to and has been on everyone's mind in debating whether the FED will raise interest rates and slow down the equity and property markets. If you follow the gist and implications of Kondratieff, you will understand that raising very short term interest rates will not lower long term global demand. If anything that would just make things worse, but that's what will be done periodically because that's really about all the FED can do other than "jawboning".
Let me say what I am not expecting soon: a crash or major depression. But based upon similar Kondratieff wave periods from 1896-1919 and 1949-1974, we can expect market pullbacks and recessions when crude goods prices and interest rates reduce corporate earnings and slow down personal incomes growth for a time. With corporate earnings in much of the world at all-time rates of growth, short term dislocations can and will occur which in turn will affect market prices. There were some pretty severe recessions in the 1950's, 1960's, and 1970's, and several bear markets. The long term growth line will re-assert itself, due to continuing demand at all levels, and prices will come back up and recessions cease.
For now there is some risk, especially if US housing continues its liquidation. Even commercial property has paused in its enormous price gains of the past seven years. US REITs are on average down on the year for the first time in a decade. Then too, nearly every asset class everywhere in the world is now adequately valued or overvalued. This was not true in 1999-2000 when US small and mid caps, bonds, physical assets, and foreign assets were all undervalued to one degree or another, and "only" US large caps and techs were substantially overvalued.
We all know that being under or over valued does not result in immediate or even intermediate term reversals to a historic mean for any asset class, anywhere. Both bubbles and the opposite, total aversions to straying from cash or bonds, can persist for long periods of time. During the Kondratieff wave expansion period, which we are now in, the pressure will be on for economic growth and the growth of prices for most investment asset classes, limiting the power or length of recessions and bear markets.
A few technical or statistical factors which might also be negative for markets in 2007 are the decennial pattern tendency and the seasonal or one year pattern. The ten year period must have been known amongst speculators and traders long before being written about. Edgar L. Smith wrote about it in a small book in 1939, "Tides in the Affairs of Men:An Appraisal of Economic Change". Using US stock market data from 1881 to 1938, Smith found that years ending in "3" or "7" were most likely to fall, and "5", "8" and "9" years most likely to rise. Others, including Edson Gould, and Martin Zweig , and Norman Fosback wrote on the same subject. Ron Gries of www.TheChartStore.com updated Smith's chart with data through 2003 and published this chart:
Years ending in "7" are still losers of at least 3% on average as well as years "0" and "1".
Then we have the one year or "seasonal" cycle. The chart for SP500 futures from 1982 as well as the Dow Jones seasonal from 1928 both show a high probability of the annual high being in January or Februarywith the normal trend being down into September or October. Rallies tend to occur in March and June, and if successful may make a low for the year, but statiscally the low of the year is more likely to be in autumn.
We have both economic and stock market probabilities "favoring" a decline this summer, but of course this is not a sure thing. Sentiment is the wild card as always, and it is neither excessively bullish or bearish at this time. For longer term investors perhaps one need not do anything, but if you have stocks or funds you were thinking of taking profits on for any reason, a further market rise might be a good time and place to do it. Speculators will know what to do if the time comes.
Recent Comments