"No warning can save people determined to grow suddently rich" - Lord Overstone

  • 8 hours Meet The Hedge Fund Billionaires Club
  • 9 hours The Next Housing Crisis Could Be Right Around The Corner
  • 10 hours Cartel's, Pirates And Corruption Cost Mexico $1.6 Billion Per Year
  • 11 hours Africa’s Fastest Growing Economy
  • 12 hours The Blockchain Boom Hits The Utilities Sector
  • 14 hours Why Smart Money Is Selling Off Right Before The Bell
  • 16 hours Tech Giants Rally Ahead Of Earnings Reports
  • 1 day Global Debt Hits 225% Of GDP
  • 1 day The World’s First Trillionaire Will Be A Space Miner
  • 1 day How Student Debt Could Cause The Next Real Estate Crisis
  • 1 day This $550 Billion Industry Is Betting On Bitcoin
  • 2 days One Commodity Set To Soar On Russian Sanctions
  • 2 days China’s New Car-Market Rules
  • 2 days Oligarch Risk: The New Red Flag For Investors
  • 2 days Five Things To Consider Before Investing In An IPO
  • 2 days Investors Bullish As Earnings Season Kicks Off
  • 2 days Nearly One-Third Of U.S. Lottery Winners Declare Bankruptcy
  • 2 days Is Facebook Still A Buy?
  • 3 days Will Blockchain Stocks Ever Bounce Back?
  • 3 days Geopolitical Tensions Fail To Boost Gold Prices
Tech Giants Rally Ahead Of Earnings Reports

Tech Giants Rally Ahead Of Earnings Reports

Earning season has just begun,…

Oligarch Risk: The New Red Flag For Investors

Oligarch Risk: The New Red Flag For Investors

Investors are scrambling to diversify…

Could Tesla Be Profitable By The End Of 2018?

Could Tesla Be Profitable By The End Of 2018?

Tesla has struggled to get…

Intermediate-term Outlook for the US Stock Market

Below is an extract from a commentary originally posted at www.speculative-investor.com on 30th March 2006.

The US stock market appears, on the surface, to have been quite firm over the past several months, but in real terms (that is, relative to gold) the market has been very weak. In fact, the following chart shows that the S&P500/gold ratio broke downward from a lengthy sideways consolidation during the final quarter of last year and is presently testing its February-2003 bottom.

A comparison of the above chart with a chart of the nominal S&P500 Index will highlight one of the major risks of betting against the stock market. The risk, for those who attempt to profit from the secular bear trend by taking-on positions that require a fall in nominal prices in order to be profitable, is that there will be sufficient inflation to prevent the market from falling by much in nominal dollar terms even while it tanks in real terms.

We have no doubt that the S&P500 Index is immersed in a secular bear market that will continue for another 5-15 years, but, as we keep emphasising, secular bear markets are about declining VALUATIONS; they do not necessarily involve declining prices. It is extremely likely that the price/earnings ratio of the S&P500 will drop to 10 or lower at some point over the next several years, but this fall in the P/E ratio could be driven more by a rise in earnings than a fall in prices. And if you think it is unlikely that the S&P500's earnings will rise by much over the next several years, consider that the composition of the senior stock indices will change. In particular, if commodities are in a secular bull market then 10 years from now oil and other commodity-related stocks -- the stocks of companies that are likely to experience very strong earnings growth for many years to come -- will probably make up 30%-40% of the market-cap-weighted S&P500 Index.

Our own expectations as to how far the S&P500's nominal value will fall over the next several years have certainly been dampened over the past 12 months by the amount of inflation that has occurred. For example, at this time last year we were expecting a test of the October-2002 lows by the final quarter of 2006, but we now expect this year's decline to end at, and the next intermediate-term advance to begin from, well above the October-2002 lows. Our thinking is that this year's decline will take the senior US stock indices down by 20%-30% from whatever peak they make over the coming weeks.

 

Back to homepage

Leave a comment

Leave a comment