During bullish market advances there is a lot of faulty analysis done in order to promote a bullish bias. Wells Fargo Advisors today pretty much just captured the gold in this competition with this piece of lunacy via Bloomberg: “Wells Fargo Advisors examined return for stocks over next 10 yrs when the start date is three years into a bull market and found in prior cycles that stocks have risen a median of 162%; implies S&P 500 can reach ~3700 by 2022.
- Firm examined five prior cycles starting in year 3 of bull market: Chief Equities Strategist Stuart Freeman in note yesterday
- 1973-1983, 1977-1987, 1983-1993, 1985-1995, 1993-2003
- 2006 cycle only 6 yrs old, posting 12% return
- 10-yr returns range from low of 57% for ’73-’83 cycle to high of 194% for ’85-’95 cycle
- “What we are suggesting is that there is much evidence the last 40-plus years of later-cycle returns following the first upleg in cyclical bull markets and periods of mid- cycle meandering”
The problems with this analysis are many. The biggest issue is that the analysis only covers the period that encompasses the greatest bull market in history. By excluding the secular bear market of the 60-70’s – the analysis is heavily skewed to the upside. The report smacks of data mining to serve a point.
Furthermore, the data periods are very misleading. The study says that the firm examined five prior cycles starting in THIRD YEAR of the bull market. This might fly by individuals who have never studied market history but 1973-1974 was one of the worst market plunges on record. The market bottomed in 1974 which means the first start date would not have been until September of 1977.
Moreover, the data sets are consistently overlapping each other so performance data is being double counted to garner higher returns.
The reality is that the markets actually do work in major long term cycles. The current bear market cycle that begin in 2000 has continued to work off the excess overvaluations that occurred during the bull market of the 80’s.
The key difference today and going forward, which nullifies Wells Fargo’s projection of the next great secular bull, is that the three main drivers of those returns no longer exist. The massive bull market from 1982-2000 was driven by falling interest rates, inflation and debt accumulation. With interest rates and inflation near zero and debt at historic levels, both public and private, the reality is that these will act more as headwinds to future stock market returns as well as the economy. Furthermore, the baby-boomer generation which were a driving factor in the 80-90’s are now beginning to cycle out and become net drawers on assets rather than accumulators.
The point to be made is that selective data mining can give you any result you want. The point of doing research, however, is to let the data challenge your own views and beliefs so that you can make more intelligent decisions about when and how to allocate investments.
After the last 11 years of this particular secular bear market, with two 50% declines in asset prices, it isn’t surprising that investors are currently chasing fixed income rather than stocks. Maybe its time for Wall Street to understand that Main Street has finally caught on to their game.
Images: Flickr (licence attribution)
About The Author
Lance Roberts – Host of Streettalk Live
After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.
Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.
Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.