Talking Points

With the holidays upon us and quickly gathering steam, I find myself reflecting on holidays past.

When considering the recession that we endured over the holiday season in the mid-seventies, it is possible to identify many similarities with the one so recently experienced: a stock market that was going nowhere fast, an unpopular war that was being fought for reasons that escaped many of us, and inflation was becoming more apparent. It wasn't all bad, however--I have many pleasant memories of holiday specials, where my family and I would sit in front of our television, watching Elvis Presley promising to be home for Christmas, Bob Hope entertaining our troops, or Johnny Cash, the man in black, singing the blues to those who were serving time in prison.

It was an interesting time to be an American.

As we recover from what many are calling one of the worst recessions since the Great Depression, it is tempting, as the year concludes, to try to predict our future fate. As is so often the case, many times we look back to peer forward.

In the book, Stumbling on Happiness, Daniel Gilbert points out that we spend roughly 12% of our day thinking about the future. However, as Christmas approaches, I am willing to wager that our children spend much more time looking ahead as they anticipate their great bounty. For us, the perpetrators of this hoax, the 'Santa Claus', we can barely think in terms of next Tuesday.

As I look forward, I can't help but do so with a degree of trepidation--not only at the thought of staying up and assembling another bicycle or dollhouse, but also because of what I see coming not this Tuesday, but several Tuesdays from now. So, I'm going to shimmy out on a very thin limb, and make my economic predictions for the coming year based on economies past.

A Forecast for the Coming Year

The current credit crises will end just like it did in the first decade of the 20th century, which of course was very similar to the one we have experienced of late. In 1907, it was JP Morgan that bailed out the banks; in 2008, it was JP Morgan that bailed out Bear Stearns. The banking crises of 1907 occurred roughly a half-century after the conclusion of The Civil War; the current crises occurred roughly a half-century after the conclusion of the WWII. In 1907, the stock market fell 37%. Last year, the market fell 37%.[1] In 1908 and 1909, the cumulative return for the market was a positive 62% [1]; as of December 17, the market is up roughly 60% from its March low.

The stock market will continue to climb its wall of worry, but only after a brief pullback. Historically, a 10% to 15% correction, like we've all been talking about, usually occurs 300 days after the stock market's initial rise, following the conclusion of a bear market. 300 days after the March market bottom would put us...well, about now. Throw in the historical perspective that for every year that has ended in a "0" since 1910 (1920, 1930, 1940, etc.), the average return of the DOW has been -8%. [2] By the way, in 1910, after the credit crises and a 62% increase for the DOW, the market fell 17.9%.

Inflation will eventually trouble us again -- but not so quickly. The rule of thumb is that it can take anywhere from 9 to 18 months after the conclusion of a recession before inflation becomes a concern. After the recession's end in 1981, it took roughly 32 months--but it still happened, and it's certainly going to happen again. Inflation is defined as more money chasing after the same number of goods, and simply to entertain your curiosity I have enclosed a chart of the US money supply going back to 1961. We know inflation is coming, we just don't know when.

Bonds will continue to attract great inflows of capital just to disappoint their investors in years to come. History has proven that inflation is the enemy to bonds. My greatest fear for advisors is that being early will be perceived as the same as being wrong.

I also predict that I will receive numerous gifts that I will never use or need. As a matter of fact, recently a study was done which indicated that of the $65 billion that will be spent on gifts this holiday season, roughly $12 billion will be 'destroyed', or wasted, as money is spent on items that we secretly hate -- the ugly tie, the garish sweater or the numerous pointless gadgets which we never would have purchased for ourselves.[3] It is great to be in America, the land of plenty.

During a period of instability in the 70's, we were entertained by the likes of Presley, Hope and Cash. Last year, during the darkest period of the recession, we quickly discovered that there was no hope, there was no cash and Elvis had left the building.

As we look back over the past decade and realize that the market has gone nowhere fast, I think we can look forward to something a little different in our stocking next year. To remind those who weren't in the industry during the decade of the 1970s, what followed was one of the greatest bull markets in recorded history.