Predictions For The Post-Crunch Stock Market
I recently wrote about the bear trap, where the market suddenly gained optimism, making traders re-enter, only to fall back down harder than ever. So what does the near future hold for the stock market and how can the stock trader profit? This article gives my thoughts on where I think the market is going. If you’ve got a different view, feel free to comment.
Firstly, are we heading into a second Great Depression? The Great Depression was caused by bank failures, as is the credit crunch, and the catalyst was stock margin lending rather than real estate lending. The stock market lead the overall economy, with the crash of 1929 leading to a long term stagnation. I don’t think that we’ll have the amount of unemployment, but we are in for a long period of flat market performance.
A recent example is the post-bubble economy in Japan since the 1990′s. Looser bank lending and growth in the money supply lead to an increase in stock prices and especially real estate prices. Poor lending practices then lead to massive bank losses and heavy government intervention.
Despite a huge amount of government fiscal stimulation, the stock market has not yet recovered in Japan. It goes up and down, but there is not a long term consistent recovery in either the economy or the stock market.
I believe that it will be a similar story for the US market. Bank failures will continue due to holdings of property that is overvalued and a vast stock of unaffordable real estate will take time to liquidate. Interest rates will be cut, money supply will be increased and government financial stimulation will simply increase debt (and therefore taxes) rather than repair the damage. In the long term, there will be a recovery, but the actions of the government will hinder rather than help this. Governments being governments will prop up the weak and inefficient and fail to make the tough decisions.
What are the implications for the stock trader? Firstly buy and hold will only work for very long periods, and even that is uncertain. The Nikkei 225 shows a long term downward trend from 1989 to 2003. It is better to have a strategy that can extract value from the rises and dips. This implies that more active traders will benefit. In the short term, the market will continue to be volatile, with frequent bear traps to lure in the long term investors, only to punish them. In the longer term, the market will value dividends over growth stocks.
Secondly, the increase in hidden money supply (masked by deflation in real estate prices, oil and consumer goods) is good for gold. Gold will continue as a store of value in uncertain times. Incidentally, gold prices are heavily manipulated, and this may present buying opportunities. Gold was confiscated by the government during the Great Depression.
Well this is my view. The world has again changed, but we can look to both the past and recent examples to understand what will happen. What is your view?
