How long can the market stay long-term flat?

Monday, July 30, 2012 at 10am
By John Friedman

Nicely ensconced atop the hubbub, sitting within the quite and privately-owned public space known as the Galleria Roof Garden, I once had a money manager say to me, we don’t have enough data.  

What he meant by that is that one hundred some-odd years of data about what happens inside the American stock market is not a large enough sample from which to drawn any conclusions about how the thing, as a whole, operates.

Thank you, Martin.  That we-don-t-have-enough-data idea really stuck with me.

After all, each major chunk — let’s think in terms of decades — has something totally unique about it, doesn’t it?   For instance, how do you siphon out the commercialization of the Internet from the decade starting in the early- to mid-90s, so that you can draw some generalizations about it?  And speaking of the WWW, how do you parse out the WWs from the ’40s and the 19-teens?

More broadly and long-term, how do you filter out the second-mover advantage the U.S. had, as our much-earlier, newly-hatched nation-self learned from (at least some of) the mistakes of other nations — avoiding hereditary monarchy, for instance — and had a nice fresh start relative to lots of other nations? And who’s to say that the advantage that we had is not fully played out at this point?  I mean, look what happened to Microsoft.

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I bring this up because, by way of the inestimable Barry Rithotz, a chart caught my eye this a.m. as I searched for a topic.

 

100 Years of the Secular Dow

 Source: as noted above,
and JP Morgan Asset Management Guide to the Markets, Q3
Please click on chart to gigantiate it 

 

Plus I’ve been noodling over a question a client sent to me, which is, in essence, the title of this post: how long can the market stay long-term flat and, as a corollary, how long will fixed income investments pay negative real interest rates?

So one answer to these questions is that, if past is prologue, then, using  the 1966-1982 flatlining as your yardstick, flatlining through 2016 is doable. That would mark 16 years since 2000, when the current flatlining began.  And — oh no! — if you use the 1906 to 1924 flatline, then you’re talking 2018.

But is past prologue?  Martin sayeth nay.

And so does The Red Queen.

And on the other hand, the last time we heard people saying “it’s a new economy” or “this time it’s different” it was not, in fact, either of those things. And I also marvel at the inertia that is the economy — how, even when it’s weak, it is incredibly resilient. Yes, there is far too much pain within its borders these days — millions of people suffering, and largely needlessly — but, yes again, the wheel, it keeps on turnin’, turnin’, turnin’, churnin’, churnin’, churnin’.

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So I don’t know how long this can last. And, as I’ve been saying for years, one of the scenarios everyone should run when projecting out their numeric financial health into the future is one in which the numbers do not grow at all.  

Because, so far at least, that is one scenario that you absotively, positilutely, can dial in for yourself, for real.

 

 

  521 words.

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