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Article: Predicting The Long Term

By Daniel Apple and Richard Baugnon


"There can be no progress if people have no faith in tomorrow."
-John Fitzgerald Kennedy

I like that quote. And I believe it to be true.

I do not believe the former president was saying that markets must continually go up, but rather that we realistically assess the way things are and have faith anyway.

I do believe that we are going to be experiencing some trials in the relatively near future that will really test who we are as people and a nation. I also believe that not only will we meet adversity with the attitude that we can overcome any obstacle, but we will come out better for it.

In this article and future articles my intention is to paint an economic picture of the way things are and not sugarcoat it.

As the economic landscape is revealed, we will look at the different investment arenas where we can find opportunities to prosper in whether times are good or rough. Additionally, why it is important to continue to invest in those things that we already believe in and support.

So, here's the short read. Barring some nuclear calamity, the markets will prove resilient for the next three to five years and then diminish from its longer positions for an extended period of time (twelve years or more). Of course, income and growth can be made whether a market rises or falls, it is just knowing when to get in and when to get out.

But determining the shorter term is not necessarily the object here. There are sophisticated investment tools that can determine, momentum, volatility and trends that can add immeasurably to one's speculation, but first, let's look at the big picture.

The Spending Wave

Harry Dent, a demographic economist brought to the forefront a very sound theory for understanding the big picture and it makes a great deal of sense. However, his previous interpretation of what to expect in the markets (a 20,000+ DJIA) will have some readers no doubt, wondering how credible his theory is in predicting the direction of markets.

By the way, I believe with all that has occurred in recent history the markets have demonstrated incredible resilience and have proven the theory despite where Dent thought the market would be by now.

So, here's the theory in a nutshell. When you correlate the population's spending pattern (demand) with the Dow Jones Industrial Average (supply) the two track closely. Makes sense. Actually, let me provide a little more detail.

Based on tracking the population of Americans, while adjusting for immigration numbers and a person's peak spending year (currently around 46 years of age) and correlating that graph with the Dow Jones Industrial Average adjusted for inflation, a very close parallel can be drawn. I know that's a mouthful to the average investor, but Mr. Dent has developed and tweaked the theory over several books.

Anyway, given that the populations' needs will not peak until somewhere between the years 2009 and 2012, we can expect a vibrant economy for another few years.

Well, maybe.

Dent might have been on the money for the Dow to track 20,000+ if our economy hadn't undergone some rather dramatic changes in the last few years. Here's the short list:

  • Tech bubble bursting

  • Mutual fund scandal

  • Accounting scandal

  • 911

  • War with Iraq

  • More mutual fund scandal

  • Housing bubble

  • Political scandal

Added to this, Bill Gross of Janus Capital Group Inc. (JNS) had stated in 2006 that the Dow could go down to 5,000 if markets should return to more realistic valuations.

So, how are we to reconcile the comments of Bill Gross with Harry Dent's thoughts on where the DJIA should be by now?

An incredibly resilient economy, I believe, is the answer.

People who shop at Macy's may have to start shopping at Mervyn's for awhile if the economy turns downward, but they still need what they need and will adjust their spending patterns accordingly.

Beyond that, in approximately the year 2009 through 2012, the first wave of the baby boomers will be entering retirement and typically adjust their portfolios to reflect less growth stock and move more into a percentage of growth with income and/or preservation of capital.

This movement by the baby boomers into retirement will continue for approximately fifteen years, with much of that time in a deepening recessionary period that would typically herald a burgeoning bond market and investments into fixed assets, such as cash and CDs. Lower returns to be sure, but positive returns in general.

However, there are economical events taking shape that will almost certainly interfere with this ‘big picture” and potentially hasten the decline of several markets simultaneously before 2009. In future articles, among other themes, we will look at the housing market, derivatives and the dollar to measure the impact of what we are facing and how to thrive and prosper despite the growing economical storm.

The opinions expressed in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your representative, attorney, or accountant with regard to your individual situation.



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