Recently Barrons advised that based on cyclical patterns of market history, the odds are better than two chances in three that the Dow Jones will reach 15,000 or higher over the next two years. Based on the same cyclical patterns, there’s about a 50-50 chance that the Dow could hit 17,000 or more.
Also, the broad fundamentals that could drive the Dow to new highs are fairly clear. The stock market enjoyed double-digit earnings growth in 2011, yet barely rose in response, mainly because of fears over the health of the domestic economy and contagion from Europe. Now that those fears have begun to subside, the market’s upside potential can be unleashed.
The market history draws on 141 years of equity performance, from which a fairly straightforward cyclical pattern can be discerned: a strong tendency for periods of worse-than-average returns to be followed by periods of better-than-average, and vice versa. Since the past five years have been squarely in the worse-than-average category, better-than-average returns in the two-year period just begun are now likely.
The cycles we see on the stock market, are based on simple arithmetic: two-year intervals following intervals of five years. Also, five-year intervals that are worse-than-average are objectively defined as belonging to the lowest quartile of all five-year periods in the 141 years tracked. Two-thirds of the time, after a five-year period like the one we’ve just seen, the market rises fast enough to lift the Dow to 15,000 or higher from present levels over the following two years.
These findings are based on the research of Wharton School finance professor Jeremy Siegel,. Jeremy has amassed numbers on stock-market performance dating back to 1871, the earliest year for which data is available.
We can also go back to 1801.
But cycles are not destiny. And even if they were, these cycles still imply one chance in three that the Dow won’t reach 15,000 over the two years.
His forecast keys off the wrong call he himself made early last year. He had expected the strong rebound in the Dow from its March ’09 lows to continue through 2011. Instead, the Dow’s gains in 2011 ran half the rate of the year before (5.5% versus 11.0%).
Even that disappointing rise was helped by the fact that the blue-chip average ran well ahead of the broader indexes, due to the attraction of its higher dividend-yielding stocks. While the Standard & Poor’s 500 index had done even better than the Dow in 2010 (+12.8%), it had zero gains in 2011.
Why the lack of follow-through, despite the growth of earnings? Two main shocks: the dramatic slowdown in U.S. economic growth that provoked renewed fears of recession, and perceived risks that the economic crisis in Europe would spill over to the U.S.
As both fears have begun to subside, the market has responded on the upside so far this year. Based on last weeks close, the Dow has risen 5.5% from its close last year, or as much as it gained through all of last year. The S&P has done even better, having risen 7.5% over the same period.
From this point, the market will be sensitive to an easing in both concerns. Economic data so far released have provided us with the hope that there will be a pickup in GDP growth, and future data should lend further support. As for euro land, while the region as a whole is probably in recession already, the market should gain support from continuing signs that a major meltdown is unlikely.
“Many stock bulls are calling for a 10% to 15% gain this year,” observes Jeremy. “But I would not be surprised to see the market up 20% or more, even if earnings growth slows.”
WHILE DOW 15,000 AND 17,000 may sound like dramatic targets, from at least two perspectives — earnings and inflation — they are actually rather modest objectives.
In 2011, earnings per share on the Dow grew 12%. Assume a slowdown to half that rate over the next two years, or 6% per year, which is lower than consensus estimates of 9% per year. Since Dow 15,000 from the yesterdays close requires an annual increase of just 8%,.
Similarly, in inflation-adjusted terms, Dow 15,000 and 17,000 are actually modest targets.
IT’S NOT SURPRISING THAT this research has helped many turn into a long-term bull. Over the 141-year period that the data covers, stock market returns, including reinvested dividends, have averaged 8.7%, or 6.4% after inflation PER ANNUM. Covered Call investors generate more than that on average per annum. Such is the power of compounding that, at a compound annual return of 6.4% per annum on dividends and reinvesting, $1,000 invested 141 years ago would be worth $5.9 million.
This is why when investing with the Fokas Beyond Covered Call Strategy overall our return on investment is higher than the general returns and remember also that we are not in it for the short term gain but the long term gain while still earning a consistent income from creating the Call option contracts.
Happy Investing.
George Fokas
==============================================
The information in this post is not intended as investment advice and must not be relied upon as such. Any advise provided in this post is General Advise Only. Past performance is no guarantee or reliable indication of future results. The recipient releases absolutely Fokas Beyond, George Fokas and/or any associates from all or any responsibility or liability for any losses, claims or demands that may be incurred as a result of the recipient using the information for investment or other purposes. The information is provided solely for general educational purposes and neither purports nor intends to be advice. No consideration has been given or will be given to the recipients’ individual investment objectives, financial situation or specific needs. Investments can rise and fall in value. The decision to invest or trade and the method selected is a personal decision and may involve an inherent level of risk. Although every effort will be made to explain the risks associated with the strategies, not all risks can or will be explained in any format. Fokas Beyond, George Fokas and/or any associates does not, and must not be construed as providing recommendations in relation to any securities or other financial products. It does not constitute and must not be construed as an offer of securities or other financial products nor is it an invitation to you to take up securities or other financial products. Furthermore, the information in this email and any attachments is confidential and is intended for the sole use of the named addressee. The recipient acknowledges that the information contained within this email is subject to copyright and is proprietary of George Fokas. Fokas Beyond, George Fokas and/or any associates made every effort to ensure with all reasonable care that the information was accurate; as no responsibility or liability is accepted by any member of George Fokas and including George Fokas for any errors, omissions or misstatements (however caused or arising).
If you suspect that this post or any attachments might have been intercepted or modified, please notify us immediately. Whilst every effort has been taken to ensure that this message is virus free when it leaves our system, we cannot guarantee that it is not infected with a virus when received by the recipient. Responsibility for ensuring that the messages and/or their attachments are virus free rests solely with the recipient.