What Will the Market Look Like Over the Next 17 Years?  October, 2001.

The stock market is, always has been, and probably always will be, the best investment area available, better than real estate, bonds, collectables, etc. But to keep it so, it's very important that investors pay attention to reality, and factor in a market strategy that will take advantage of the type of market that can be expected looking forward, not backward. Let's have a look from another perspective at what kind of market we can expect in the future, by looking at a breakdown of the market's patterns over the last 100 years, at how strong periods were repeatedly followed by weak periods, and vice versa. Basically, the last hundred years can be divided into six periods:

1901-21: 20 years of a sideways to down secular bear market.

The market made zero gains or losses for a buy and hold investor who held through the entire 20-year period. Expressed that way it sounds like a profitless but easy period to hold through. However, it was far from that, since there were six bear-markets, in four of which the Dow lost more than 40%. A horrible time for buy and hold investors. But then there were few, if any of those. Market-timing and intermediate-term trading was the only acceptable strategy, made popular by the big-names of the time, Joseph P. Kennedy, Walter Chrysler, Bernard Baruch, Vanderbilt, J.P. Morgan, and hundreds of others who became extremely wealthy following the strategy, taking profits as rallies became over-extended, buying back at the low prices after a decline, and even more so, selling short to make additional gains from the downside.

That period was followed by:

1921-29: 8 Years of a strong secular bull market.

The market averaged 25% gains per year for eight years without a serious correction, causing investors to adopt a buy and hold approach (just in time for the 1929 crash, and the worst bear market in history (1929-32), in which the Dow lost 90% of its value). (The period was very similar to the recent 1991-2000 bull market which broke the 1921-29 record for longevity by one year, and also allowed Wall Street to convince investors that a buy & hold strategy would work).

The 1921-29 period was followed by:

1929-49:

Only market-timers like Joseph P. Kennedy, Bernard Baruch, and the other famous names, whose strategy had always been to take their profits near the rally tops and sell short for declines, emerged unscathed from the 1929 crash and 1929-32 bear market. In fact not only unscathed, but much more wealthy thanks to the bear market. During the entire 20 year period of 1929-1949, the market remained well below its 1928, 1929 levels. But again, while it was a poor investing time for buy and hold investors, it was a great time for market-timers. There were six bear markets in those 20 years, including the 1929-32 bear in which the market lost 90% of its value, and five others in which the Dow lost from 23% to 49% (they don't look like much in this chart due to the devastating plunge from 1929-32). Meanwhile, market-timers had opportunities to make huge gains from both the upside and downside. (For buy & hold investors the market didn't 'come back' to its 1929 level for 26 years. 

That period was followed by:

1949-66: 17 years of a strong secular bull market.

The market returned to a positive period. It averaged annual gains of 14% per year over this 17-year period.

This strong 17 year period was followed by:

1966-1982: 16 years of a sideways to down secular bear market.

During this 16-year period, as the following chart shows, the market again made no gains for buy and hold investors. But for market-timers and traders there were again serious corrections and bear markets of up to 45%, ample opportunities to make gains over and over again from both the upside and from short-sales for the downside. And market-timing was still just about the only strategies considered by investors, so seriously burned were they by their occasional sojourns into buy and hold investing. 

That 16-year period of no gains for buy and hold investors was followed by:

1982-2000: 18 years of strong secular bull market.

And here we had an 18 year period of the last secular bull market, when the S&P 500 averaged sizable annual double-digit gains. During the period there was the 1987 crash, the 1990 cyclical bear market, and a decline in 1998 of 19% for the S&P 500 and 35% for the Nasdaq. However, from the 1990 low, the market treated investors to a long, one-direction bull market, during which there was not even a 10% pullback until 1998, setting an all-time record for one-sided volatility.

And that, coupled with the record setting gains as the 1995-99 bubble continued to expand, enticed investors in as never before. The S&P 500 gained from 20% to 25% a year for four years in a row in the final four years. And investors were again enticed to adopt a buy and hold strategy, just in time for the 2000-2001 bear market plunge.

And that 17-year period will be followed by:

2000- ?: Most likely a 10 to 18 year period of sideways to down secular bear market, within which there will be numerous cyclical bull markets like that of 2002-2005.

The last completed period, 1982-2000, was an 18 year strong period. If history, and the above record of positive perioids being followed by negative periods is any guide, the next period from 2000-? will be one like those of 1901-1921, 1929-45, and 1966-82,  when buy and hold investors made zero, but market-timers and those willing to take intermediate-term trades, could benefit big-time, with few stagnant periods when the market is not moving one way or the other.

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