Tuesday, September 7, 2010

Waiting for 2017 (or 2018)

A lot of long-term analysis seems to be converging towards the launch of a new secular stock bull in the 2017-2018 timeframe.

Jeremy Grantham revisited his “seven lean years” scenario in his July quarterly letter July. About a year ago, Art Cashin highlighted the 17.6 year stock market cycle, which pointed to a bottom around 2017. I also wrote about an academic study that correlated demographic trends to P/E ratios, which pointed to a long-term bottom around 2018. I also suggested that while markets are likely to be flat longer term, they are going to be volatile and experience huge intermediate term swings.

Investment Policy for a Lost Decade
At best, this scenario means nearly a decade of flat returns. In this case, standard buy-and-hold asset allocations will disappoint investors with their low returns and high volatility.

Some investment strategists, like David Rosenberg at Gluskin Sheff, advocate an approach of focusing on yield and safety for return and risk mitigation. That's a good "first order" solution, but there is another way. During Japan’s Lost Decades, there were huge swings in the market that an astute investor could have profited from. Albert Edwards of SocGen agrees and wrote:

I have long maintained that even within a structural bear market, there are huge returns to be made in equities from participating in short-lived cyclical rallies like the one we have just seen. The Nikkei regularly used to enjoy 40-50% rallies as policy stimulus drove pronounced cyclical upturns in both GDP and profits.
My preferred investment approach, which I wrote about in the Qwest Investment Management’s September 2010 newsletter, is to embrace the volatility and use dynamic asset allocation techniques to trade the intermediate swings in the market.

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