Super Boom Update: Enjoy This Bull Market While It Lasts
By: By Jeffrey A, Hirsch & Christopher Mistal
March 05, 2015
Happy Birthday Bull Market! By the 20% bear market rule this bull market turns 6-years old next week. Using the widely accepted Ned Davis Research criteria for a bear market of a 13% DJIA decline after 145 calendar days, we count the 16.8% DJIA decline from April 29, 2011 to October 3, 2011 as an official bear market. S&P lost 19.4% and NASDAQ was down 18.7% over that time span. 

We still expect the market to leak higher through the spring of 2015 toward our forecasted first half high of about DJIA 19000. Then after some choppy sideways summer trading, the market should rally into yearend perhaps making a slightly higher high. But after that we are concerned that the final cyclical bear market of this secular bear market that began in 1998-2000 will begin to manifest itself. 

That’s right; we are one of the few who believe that we are still in a secular bear market. Except for a few apocalyptic forecasters and permabears, who will remain nameless and who have been rather off in their projections, most of us agree that March 2009 was the low point of this secular bear market. But people seem to forget that secular bull and bear markets do not necessarily begin and end at their highest and lowest points.

As we illustrated on February 12 in “What’s Next for the Stock Market?”, the last two secular bears had a 3-stage decline with the middle one being the greatest, but the end point being the 3rd and most shallow cyclical bear with the low in 1982 and 1949 being in the vicinity of the previous two highs. The last decline of the previous secular bear after WWI bottomed in 1921 at the end of the secular bear when the US-German Peace Treaty was signed in Berlin on August 25. 1921. The bear market low was August 24, 1921.

So, we felt this was a perfect time to update what my friend Josh Brown, The Reformed Broker and CEO of Ritholtz Wealth Management, calls his “Favorite Chart on Earth.” As a likely contentious election year gets underway in 2016 and the effects of the end of US quantitative easing and likely rate hikes begin to be felt, the next 2-3 years are likely to be more difficult for the global economy and the market than the last 6 have. So enjoy it while you can. A major pause or two over the next few years is quite likely from an historical perspective. 

Back in 2011 when my book Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It (Wiley) hit the stores I drafted a bold 15-year DJIA projection chart. This forecast does not anticipate DJIA reaching 38,820 until around the year 2025 – and for the current secular bear market that began in 2000 to drag on until 2017 or 2018 before the next boom and secular bull commences. 

[500% Moves Follow Inflation]

As DJIA has pushed substantially above the high range of that chart (not because of a massive global economic boom or peace, but because of unprecedented easy monetary policy), I have again raised the floor on my initial forecast. The end game still is in play and the means to the end has only been elevated to account for this new easy money world. We still expect some tough sledding over the next few years in the market.

When I first made my super boom forecast in May 2010 in this space DJIA was around 10,000, unemployment was quite high, the great recession was barely in the rearview, and global debt was a new and growing concern. So my prediction that the Dow would reach 38820 by 2025 seemed absurd to many when we announced it. That came as no surprise—all bold predictions are first lambasted before proven true. This super boom is not only plausible, but mathematically and historically within reason. Now that DJIA is above 18,000 it looks even more credulous.

As for the next Super Boom already being underway, we are not convinced just yet. The low point of the economy and the bottom of the stock market now clearly appear to be behind us. But other factors have yet to align. The war on terror is still raging, a paradigm shifting technology has yet to emerge and inflation is subdued. Sorry, but 3D Printing and Fracking are not likely to change the world for the individual consumer like the car or the PC did. CPI has risen just 34% since 2001. We are still plagued by political dysfunction and the next administration is likely to have a rather tough go of it before we can get back to some real bipartisan leadership and policy initiatives.

This projection was based upon nearly 50 years of research and analysis into stock market cycles, patterns and seasonality. When I drew it in March 2011, I anticipated that the market would at least challenge its previous all-time highs before failing and falling to a low in midterm election year 2014 and another low in 2017-2018 before the next super boom truly began. That was based upon a projected high of 14,000 and an above-average bear market loss approaching -40%. 

I used the final cyclical bear markets of the last secular bears ending in 1921, 1949, and 1982 along with the long-term support level around 8,000 from the post-9/11 lows, through the 2002 and 2008-2009 bear markets as the basis for the potential magnitude of this decline. Now that DJIA has exceeded the high end of my range, the 2018 midterm low is likely to be higher, likely in the DJIA 14,000-15,000 range or a 20-30% decline from expected high point levels. The purple line in the chart below illustrates the updated forecast.

Now for the good news. While we are projecting a garden variety bear market of -20-30% to bottom sometime in the 2016-2018 timeframe, early signs of the end of the secular bear and coming Super Boom have begun to materialize presently. The commodity secular bull market since 2000 is beginning to wane and even the 30-year bull market in bonds that began near the end of the last secular bear for stocks in 1980-82 looks to be finally fading. 

In addition, new market leaders are rising to the top and we may get our next paradigm shifting culturally enabling technology from Biotech, Healthcare or perhaps robotics or alternative energy. But that remains to be seen. Either way, continue to let your winners ride and enjoy this bull while it lasts, Just be prepared for gains to be less easy to come by over the next few years while the stage is set for the Next Super Boom and secular bull market.