The Seven Year Cycle and The Prospects For 2016
By Eliseo "Jojo" Prisno, CRPC, MS
Chartered Retirement Planning Counselor
PE CAPITAL INVESTMENTS
Happy New Year! 2015 was indeed a wild ride ending the market almost flat. Putting the past year in the back burner, what’s in store for us investors in 2016? Before I begin with my prognosis, let me share to you a table on the historical returns of the S&P 500, a bellwether of the US economic performance. The table captures historical returns as far as 1984 (the year I graduated from high school) until 2014. What is significant of this capture is it covers the bull run of the 90’s and the Internet bubble in 2000 which led to a three year downturn including that dreadful event in 2001. It also captures the rebound after the 2008 recession which is now historically known as the second worst economic meltdown since modern economics was established. The first being the Great Depression a decade before the Second World War. These financial or economic events as per most economists are the kind that could only happened once in a lifetime. As what I wrote in my previous article, between the Great Depression and the Great Recession were global events (The Second World War, The Korean War, Vietnam War, the oil embargo in the 70’s, The Gulf War, the 9/11 attacks and most recently the Iraq War) were enough to fuel economic havoc, yet that 80 year span in the US economy remained very resilient.
Examining the table gives us a very good perspective on how efficient the stock market is and how significant historical events affect market performance. Of the 5 corrections (negative returns), each translates to a major global event of either a war or a financial fiasco. 1990, for example, if everyone remembers was the Desert Storm, when Iraq tried to annex Kuwait and the free world came to the rescue. 2000 was of course the internet bubble followed by the attacks of 9/11 in 2001 while 2002 was a financial fiasco when Enron and Worldcom, two blue chip entities failed and dissolved that year (because of fraud and mismanagement). It would take another six years for the market to correct and that was in 2008 when the mortgage meltdown came into being. What is quite interesting is everyone remembers the years the market corrected but no one remembers how it recovered. Looking at the years 1991 (a 30.47% return), 2003 (at 28.69%) and 2009 (26.46%), these are strong rebounds from a previous year corrections. These recoveries unfortunately are unheralded and most ill-informed investors still portrait the stock market as too risky and inefficient.
If you examine further, try to capture 2007 to 2013, a period which covers the meltdown of 2008. By the end of 2007, your investment was already valued at 16.38 and when the 2008 turmoil came in, your asset had a haircut of 37% which brought down the value to 10.97. However in 2009, a big rebound came in with 26.46% and followed by another 15.06%. Applying the law of compounding by end 2010 you almost went back to your original value in 2007. 2011 was more of a flat market (2.11%) however 2012, 2013 and 2014 were fantastic market returns compounding your asset almost twice the value from end 2007. Those investors that bailed out in 2008 because of being ill-informed and then placed their assets in low growth and low yielding instruments obviously did not recover quickly. The panic of trying to save the value of their investment assets backfired by missing the recovery.
Looking deeper into this table, it seems evident that almost every six or seven years, the market corrects (correction by the way is a negative return). Taking 2015 as a correction year, go back seven years is 2008, from 2008 go back seven years again is 2000. It’s almost predictable that in about seven years that market will contract. This market correction is technically part of the market’s efficiency, if the market keeps on going up without correcting, it is inflationary and too much inflation is not good for an economy. What is also pretty evident is after every correction is a strong rebound. Thus, for 2016 given the 2015 market contraction will potentially be a strong rebound and what supports this rebound is the current strong economic fundaments of our country (compared to the recession in 2009).
The stock market game is buying low and selling high, this is now your entry point to buy low, and if the seven year cycle is perfect, the next 4-5 years will be a prosperous ride. Contact your investment professional licensed to deal with securities if you want to start investing in stock market.
ABOUT THE WRITER: Eliseo Jojo Prisno is a Chartered Retirement Planning Counselor (CRPC).He founded P/E Capital Investments in 2010, a State Registered Investment Advisory Firm (CRD# 172695) and is currently the firm’s Managing Director and Senior Investment Advisor. Mr. Prisno also manages a Fund of Funds investment program with Ameritas and runs an All-Equity Growth and Income customized portfolios in separate accounts via E*Trade Securities. If you have questions email j.prisno@PEcapitalinvestments.com or call 1-888-929-2825. Visit our website www.PEcapitalinvestments.com