11-02-2009

Let the 70's Be Your Guide; the Current Correction

By far, the best call I made this year happened on Feburary 24^th.  You can read it on my blog:  www.beaconcommentary.com.  It was entitled “1974 Redux the Coming Rally; Post Apocalyptic Walk.”  I explained that I had started in the bussiness during the mid-70’s recession and that despite extreme pessimism, drive by systemic problems, the market had managed to forecast the recovery coming in 1976 early in 1975.  I ended the piece stating:

“Don’t expect to figure out exactly when the market will bottom, or when it will rally 50% off of that bottom.  I sure didn’t at Christmas time in 1974, and I don’t expect to be able to figure it out during the Spring of 2009 either.”

The bottom line is that my 70’s experience gave me the courage to extrapolate a similar outcome in 2009.  Having had this success, it is somewhat natural for me to take a closer look at what happened later in 1975 to reference the market correction that we are having.

In the 1970’s, the market bottomed late in 1974, and hit a short-term peak in July of 1975, seven months later.  This time around, stock markets bottomed in March of 2009 and hit what may be a short-term peak late in October.  In the 1970’s, the Dow had rallied about 53%.  In 2009, the Dow has rallied about 54%. 

Two and one and half months later, the Dow was down about 11% in the 1970’s.  Three months later, it was just about back to its previous peak.  One year after that, on 12/31/1976, the Dow was again over 1000- a full 75% rally off the December 1974 low. 

Will things turn out exactly the same this time?  Who knows?  I certainly don’t know why things would work out exactly the same.  The problems are different this time.  The political backdrop is different.  We are most likely at the end of a long cycle of disinflation right now, rather than getting to the end of a long inflation cycle like we were in the 1970’s.  However, the one thing that could be similar is that we are most likely beginning a new business cycle after a brutal recession.  If that is the most important factor then the markets might act in a similar regard.

If our markets today mimic the path of the mid-70’s market, we might have a correction that would take us to around 9000 over the next few months and then back to 10,000 a few months later, and by March 2011, we could be at a Dow of 11,500.

This doesn’t in any way negate or change the advice we have been giving to our clients. 

Buy corrections:  Trying to sell out to avoid corrections and then buy back in in time for the following rally…..is a loser’s game. 

Look for ways to invest in the rapid growth outside of the United States:   Many companies in the United States are quickly figuring out how to view their customers as one large world market.  Many companies outside the United States will experience rapid growth for the next few decades.

Keep your bond maturities rather short:   In our opinion, the odds of interest rates staying low for the next ten years is very small indeed.  You need to forgo some extra interest now to be able to take advantage of substantially higher interest rates coming in the next several years.  

Things may not turn out exactly like they did in the 1970’s in the stock market, however, after watching the market cycles from the mid-1970’s through the current one, it’s the best guide I have and gives me confidence that investors can stay the course and repair their personal net worth.  

Fred S. Fraenkel
Vice Chairman and
Chairman of Investment Policy
Beacon Trust Company

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