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What Time Is It?
From the June 2000 Popular Science article (page 72) that mentions the Pluto-Kuiper Express space mission scheduled to rendezvous with Pluto in 2015. I started this week's column with the above quote to help us focus on the big picture and rise above the petty hype and spin of the daily business world. After all, it's the big economic picture that makes our lifestyles possible, even while the art of creating wealth lies in the details. Like a trapeze artist working with a safety net, the long term trends in this global information age economy allow us to sleep well at night, perhaps too well. In fact, if it weren't for the long term secular bull trends of the stock markets -- that is, if the US economy hadn't continued its expansion begun decades ago, history would look quite different today. Historical Trendlines Let's put things in perspective. Since the inception of the railroads the general uber-trend has been for the US equity markets to rise in a jerky cycle of boom and bust headed ever higher. On a hundred-year graph, even the Great Depression is little more than an intermediate downturn in the big picture. The stock markets have continued to rise at an average of about 8% per year for a century because the US economy has a lifetime long history of expansion. The gross national product has grown almost continually while productivity improvements due to technological innovation have been the rule since the invention of the steam engine in the 18th century. Around 1982, the stock markets elevated the ascent of their trendlines, due in part to improving productivity and the event of the 401K, to begin the current "secular bull market" which is still going strong today. In spite of a few recessions, including the famous Black Monday panic of October 19th 1987, the Dow and the Nasdaq have trundled ahead with consistently improving returns earning accolades as the "longest running bull market in history" according to, well, everyone. While those who invested in Microsoft, Intel or EMC in the 1980's became millionaires if they held on, the amazing truth is that with few exceptions almost anyone investing in almost any large cap stock since then has seen far superior returns on their investment than could have been achieved outside the equity markets. Furthermore the popularization of mutual funds created an environment where investors did not have to become adept stock pickers to make money, they merely had to define their preferred level of risk and leave the driving to professional fund managers. After a minor recession in 1994, (btw, many analysts see that time as the closest model for today) the stock markets, particularly the tech heavy Nasdaq, steepened their angle of ascent once again. The Asian crisis and then the Russian crisis tempered the uptrend, but the surging demand for equity in rapid growth technology burst the dam in 1999 sending the Nasdaq very nearly vertical last November to an apogee in March. In spite of the recent bloodbath in the dot-coms and the 30% dip from the Nasdaq's peak, no one doubts the continuation of the long term secular bull market. Even if the Federal Reserve's aggressive interest rate policy leads to a pronounced slowing of the economy or a recession, the secular bull market trend will remain intact. The Uber-Trends Driving History There are four uber-trends that assure, barring disaster, the major upward direction in the stock markets will continue to dominate over whatever intermediate bear markets are tossed in its path. The first is the accelerating pace of technological innovation, which guarantees high rates of productivity increases as far into the future as the imagination dares to wander. Increasing productivity makes possible high rates of economic growth sans inflation while adding perks to everyone's lifestyle. Rising productivity is always a win-win scenario. The second uber-trend is the networking of a truly global economy. We love to talk about the global economy like it's a done deal, but in fact, there is a huge percentage of the world's possible markets that are yet to be integrated. The entire continent of Africa is off-line. China was only last week finally admitted to the World Trade Organization. Half the world still lives in obscene poverty. International trade could double or triple from here and still see no end in sight. Decades of amazing growth lie ahead for any nation capable of embracing the universal values of personal freedom, private property, rule of law and mass education for their people. The third uber-trend is really a sub set of the second -- the liberalizing and standardizing of financial markets everywhere. Someday, you'll buy stocks on the Hang Seng and the Dax with your online brokerage account as cheaply and as easily as you shop the Nasdaq or the Dow today. As equity markets overseas become more transparent and the barriers to global participation fall, money from anywhere can flow to anywhere else it wants to go for the best returns. Levels of global financial market efficiencies unimaginable a few years ago are being implemented today. There are a dozen other trends increasing wealth distribution on this planet, such as the Internet, or the standardization around a few international currencies, or the interweaving of economies to the extent that war between nations becomes increasingly impossible to consider. But it's the " ephemeralization" of the economy that is the most important uber-trend for the future of the Earth. We are simply using less stuff than ever before to build things. Ephemeralization began last century as design innovations in every science led inexorably towards the use of less metal, plastics and fuel to get improved vehicles, housing, computers or whatever. Ephemeralization means the limited natural resources and environment can be stretched further without breaking down. With the blossoming of nanotechnologies later this decade the ephemeralization process will pick up speed in some quiet possibly unimaginable directions. The ultimate hope is for the human/machine economy to reach a level of sustainable equilibrium with the Earth's biosphere before the end of this century. Anything less means the human species will face extinction, much less a bear market. In conclusion, nothing sort of an asteroid, nuclear warfare or the polar ice caps melting can stop the global economic boom from continuing for decades hence. Obviously, well-placed investments in the ongoing global expansion will pay off handsomely in the long term. The Little Picture. The Nasdaq high of 5132 on March 10th 2000 really pushed the upside envelope of the bull market trendlines extending back to 1982. Markets that peak at the very high end of their trading ranges tend to win trips back down to at least the mid-line, if not the low end of their trading range, before continuing upward again. The only other possibility is that the 18-year long bull trendlines need to be modified to a more vertical angle but the Federal Reserve seems intent on not allowing for that to happen. However, the adherents of the New Economy think it's in the cards. So while we are historically in the midst of a long-term bull market, there is considerable leeway to scare the dickens out of investors with less than a several year horizon. If today's high end of the trading range for 19-year bull trend is about 12,000 for the Dow and 5,000 for the Nasdaq, the low end is 7,000 and 2,000 respectively. With stock price volatility at the highest level ever and having just bounced off the high end of the trading range spectrum, investors should be aware of how low stocks could swing and still not break the historical bull market trend we enjoy. As we stand here at the beginning of relief summer rally it's good to remember where we are in history. The long-term secular trend points towards a Dow 30,000 and Nasdaq 15,000 in 10 to 20 years. The intermediate trend lines point downward towards a Dow 9,500 and a Nasdaq 2800, with tradable lows in the autumn. Meanwhile, the short term calls for a profitable little summer rally. Now you know what time it is. Your comments are welcomed. |