Wednesday, May 21, 2014

How bad will the 60-year cycle bottom be?

Question:  “How volatile or troublesome for markets do you see this descent into October's Kress cycle low?  Also, do you really think equities could kick on further from the heights they've already achieved?

Answer: In answer to your first question, I don’t see the coming final descent of the 60-year cycle into October to be extremely troublesome for the financial market.  The long-term Kress cycle theory promises at least one major crash – the type that occurs maybe once every 60-80 years – during the “hard down” phase of the 60-year cycle.  Mr. Kress defined the hard down phase as the final 8-12% of any cycle’s duration, which averages out to 10%.  Ten percent of 60 years is six years, which if we subtract from 2014 (when the cycle is due to bottom) brings us back to 2008.  That’s exactly when the credit crisis happened, which I believe was the once-in-a-lifetime crash that Mr. Kress predicted. 

History shows that sometimes market crashes occur somewhat ahead of scheduled cycle bottoms due to the influence of investor psychology.  If investor sentiment is too frothy and markets are over-extended, a crash can occur earlier than scheduled.  The stock market crashed in 1929-30 some five years ahead of the scheduled 40-year cycle bottom, but this was still within the allotted 12% “hard down” phase of the cycle.  While it’s still possible, indeed likely, that the bottoming of the current 60-year cycle this autumn will bring with it increasing volatility, the odds of a major crash occurring between now and then are extremely low. 

As to how much more upside potential the stock market has in 2015 and beyond after the 60-year cycle bottoms this year, it wouldn’t surprise if the rally from the 2009 low were only the half-way point of the bull market.  Following a major crash like the one we saw in 2008, a secular bull market that lasts around 8-10 years isn’t unusual.  The 60-year cycle bottom of the mid-1890s, the Axe-Houghton stock market index bottom advanced from a low of around 45 to a high of around 150 some 10 years later before the next major bear market occurred. 

Of course there will be periodic setbacks and “corrections” that occur over the course of the bull market and we may still witness such a setback this summer before the 60-year cycle bottoms.  But I would say the odds that the 60-year cycle will completely derail the bull market are slim.