A Decade+ to Remember

Let’s briefly recap…

• Inflationary pressure accelerates due to undisciplined government spending
   
• Economic growth stifles, unemployment increases and wage stagflation becomes apparent
   
• Recession takes hold of Economy
   
• Stock market falls an unprecedented 50%
   
• Oil prices quintupled as geopolitical pressure in oil producing nations is heightened
   
• Market volatility soars – option and future contract trading hits all time high
   
• Recession end drives market back toward highs
   
• Brokerage firms return to profitability
   
• US Trade Balance become negative as cheaper imports flood US
   
• Inflation becomes the Federal Reserve’s primary concern
   
• As the decade progresses, investor confidence in the markets fall due to the social and political environment

Some would say this is a unique situation and it couldn’t happen again. Some may choose to believe it is the beginning of an everlasting change and potential shift from the greatest economic power in the world.

And then there’s me; a market historian & analyst who believes time and perseverance – embedded in every American since birth – will prove to be triumphant.

Nevertheless, history is the true teacher. As Oliver Wendell Homes once said; “When I want to understand what is happening today and try to decide what will happen tomorrow; I look back because a page of history is worth a volume of logic.”

Here’s the interesting part, the bullet points above are taken from the period of one of the longest, as of yet, Secular Channels (more than 5-years) in US market history (1966-1982). The Dow Jones Industrial Average hit the 1,000 mark in January of 1966, which it didn’t surpass – other than brief periods of cyclical bear market rebounds – until October of 1982.

Who says history can’t repeat itself. In 2002 I developed a market theory & corresponding Dow Chart which combined long-term fundamental valuations with market technicals. It is called “The 100-Year Market Theory.” (See original theory and ’07 update for detailed description) 

When the theory was initially published at the onset of 2004 it stated the market, based on fundamental valuations and price action, will most likely be in another secular channel for 18-years which began at the turn of the millennium. I was almost ostracized from the industry.

Even Ron Insanna, on CNBC’s “Street Signs”, took a shot at it in November of 2005 stating, “…it was quite a stretch.” Now, as an industry-recognized theory jokingly referred to as “The Tuttle Channel”, I frequently provide updates as to where the markets’ position is relative to said channel; hence today’s piece. (Our corresponding 100-Year Dow Chart is also updated annually with latest annual data – just released 03/11) 

As of 2010-2011 the DJIA is once again pushing the topside of the long-term channel – around 12,000. If history does in fact repeat, given the current valuations (P/E multiple – not shown here) in combination with current price levels and length of time within aforementioned channel, probabilities lie with further consolidation and potential downward market action.

Here’s the question… “Are the markets only 2/3rd the way through waning off the excessive valuations built up from the last secular Bull-run from 1982-2000?”

To be clear, this is not to be construed as a prediction, but rather an analysis of risk vs. reward. If the weight of evidence – including, but not limited to, global economic concerns, valuations, geopolitical events, inflation, catastrophes, etc. – are the driving factors for our investment stance, then we should at minimum take note!

KAT
Kevin A. Tuttle, CEO & Chief Strategist
Tuttle Asset Management, LLC
kat@tuttleassetmanagement.com
www.tuttleassetmanagement.com