Monday, February 3, 2014

Will this year be a repeat of 2008 for the stock market?

Question: “Based of the prior history of the 120 year bottom in conjunction with the concurrent bottoming of the various sub-cycles, do you have an expectation of the magnitude of the probable decline?   The stock market declined about 58% basis the S&P 500 into the early March 2009 low.  Would the final down phase of these great cycles be expected to at least match that decline in intensity (at least on an inflation adjusted basis)?  Or, because of QE, did the majority of the cyclical stock market decline this time occur during 2007-2009?  The 50% off type of declines occurred in 2000-02 and 2007-09. Perhaps we have one final 50% off type of decline coming in the future.

“The one index that truly crashed in 2008 which has not significantly recovered is the Baltic Dry Index.  The May 2008 high was 11,793 and the low in December 2008 was 663.  The past year's range was 735-2,337 with a recent reading around 1,700.  The 2,000 level appeared to be resistance from 1985-2003.  The 2,000 level might be a good indicator to focus on as representative of international trading and demand of certain commodities.”

Answer: Unfortunately there is no way of determining the magnitude of the decline associated with the Kress cycles.  Bud Kress himself was always the first to caution that he couldn't be held responsible for magnitude; his primary concern was with direction.  As he used to say, magnitude is the result of cycles + technicals + sentiment.  

In holding to this formula, I can't make any specific predictions about how low stocks may go before the 120-year cycle bottom is in later this year.  You make a good observation that the severity of the decline during 2007-09 may have taken some of the downside potential away from this year's cycle bottom, just as the 1929-30 decline took much of the emphasis away from the 40-year cycle bottom of 1934.  However, with the emerging markets (China in particular) a problem, we could see some serious spillover effects as the year progresses.  I suspect it won't be as bad as 2008, but by the same token 2014 will probably be much worse than what the average Wall Street analysts is expecting.

As for the Baltic Index, this is an excellent barometer of the deflationary pressure being exerted by the bottoming 120-year cycle.  If this correlation holds it will probably put in its final low by the end of the year.