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A bit of a conundrum

Lesley Beath  |  13 Jan 2015Text size  Decrease  Increase  |  

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To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does have an interest in the securities disclosed in this report.


Overview

At the beginning of 2014, I suggested that the year ahead could be a tough one for investors with some wide swings but little gains.

For the Australian market that has come to pass, but I must admit that the strength of the US market was a bit of a surprise. That outlook was based on some longer-term cycles that I often talk about at the beginning of each year.

So as we start another new year, what are some of the longer-term cycles suggesting?

Before we look at what I think are some of the most reliable of these cycles, it should be noted that cycles should be viewed as a roadmap. They cannot be viewed in isolation, and if the price action is in contrast to the cyclical expectations, I would always defer to the former.

Some of the cycles that have proved most reliable over time include the US Presidential cycle, the Decennial cycle, the Benner-Fibonacci cycle, and the Martin Armstrong Economic Confidence Model. They are not always reliable but they can be kept in mind when trying to assess the outlook for the year ahead.

Let's start with the Presidential cycle. This theory was put forward by Yale Hirsch, founder of the Stock Trader's Almanac. This cycle, as its name suggests, revolves around the four-year US presidential term.

History shows that US stock markets are weakest in the year following the election of a new president and significantly higher in the last two years of the presidential term.

The thoughts behind this are that as an election draws nearer the current administration will do what it can to stimulate the economy, as opposed to the first two years of the president's mandate when sacrifices are generally made.

This suggested that spending would be greater and interest rates lower in the year or two leading up the election.

But over the past few years QE has had a big impact and may well have overridden the current cycle. We could well get an up year in the US but I don't think it should be attributed to the Presidential cycle, as further stimulus appears unlikely.

Put briefly, the Benner-Fibonacci cycle suggests that stock-market peaks tend to follow a repeating eight-nine-10 yearly pattern, with troughs following a cycle of 16-18-20 years.

The cycle has been extremely accurate in the past, calling over the years for a low in 1995, a high in 2000 and a low in 2003. It did not identify the 2007 peak, instead predicting a major top in 2010. It called for a major low in 2011, leading to a major peak in 2018.

But with seven years between the 2011 low and the forecast 2018 peak, a lot could happen in 2015. In my view, this cycle has little impact this year.

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