Just when a new bull market in a category of investments (stocks or commodities, etc.) is percolating to the top, investors may still be immersed in the psychology of investing in the previous bull market's most favored investment. As the maturing trend dies out, investors may still try to find reasons to invest in that trend, even though it may be actually reversing, with some investors playing yesterday's game. This may happen just when the long-term trend for the mature trend may have turned down.
For example, hypothetically, if the case were true that the recent 2007 stock market squalls signified a coming bear top in the market, many players by definition would not recognize such and would, looking through the rear view mirror, be playing yesterday's game, still investing in the dying bull market.
These types of long-term reversals do not happen often, but such reversals present opportunities to preserve past bull market profits and to invest in a new bull market's investments. There is a fundamental change in the psychology of the markets when this transition occurs – and it needs to be recognized. But that is easier said than done.
I recall shortly after the great stock market bull of the 1980's launched in 1982-3, many prominent investors were incredulous about the market's powerful launch. After all, the Dow average had hit a peak of slightly over 1000 back in 1966, and was only finally 16 years later in 1982 decisively breaking through that level once again.
Even back then in the Stone Age, on the popular eighties-era NBC "Family Ties" television series, Alex Keaton, the character played by
Michael J. Fox, exclaimed that 1000 was the new floor for the stock market! I think we all knew how important it was at that time for the stock market to exceed the boundaries that had restricted stock prices for over a decade and a half before 1982.
I think one of the reasons why many people were not more fully invested in the stock market during that exciting time was that they were fighting yesterday's investment battle. Investors were scarred by the brutal collapse of the one-decision Nifty-Fifty stocks in
1973-74. Economic conditions were extremely poor during those years with inflation raging and interest rates soaring. These were the
worst recessionary times since the Great Depression. Investors were in no mood to buy stocks – no return, no sizzle – at that time.
However, nothing had been more dazzling to the markets in the late 1970's than the spectacular bull market in gold prices that climaxed at about $850 per ounce at the end of the decade. Indeed back in the late seventies up until the launch of the 1980's super-bull market in stocks, gold dominated the minds of investors. Not only were gold prices and shares escalating at that time, but oil and oil service companies were on the march as well. This certainly compares in many ways with events in today's gold and oil markets.
This dramatic 1970's bull trend in gold was my initiation into the financial markets for the financially innocent 20-something I was
then. But I found myself psychologically fighting yesterday's investment battle soon after the stock market took off in 1982. Yes,
I owned stocks, but I was still wondering when gold was going to recover, which by 1982 had collapsed in price to $300 per ounce after
the speculative frenzy in per ounce prices broke.
Indeed, it is possible that gold prices and the stock market can move in the same direction. When the stock market took off in the early 1980's, the gold market rallied from $300 - $500, and I somehow believed there was still hope for gold. However, as time passed, I realized the promise of equities and held stocks, and over time the psychology and mystique surrounding the gold market faded, that is until now, over twenty years later.
Where are we now in the scenario of transitioning leadership and bull markets? What market will be the most forceful on the upside in the coming few years? Well, the process began when the price of gold, oil, gold shares and oil shares in 2003 began escalating in a manner of building inflationary pressures after Federal Reserve Board monetary ease during the millennium recession. Gold and oil have more than doubled in price, and equities have risen with them in an unseemly liaison. In fact, they have risen so much (with gold now around $800 per ounce), oil, gold, oil shares, and gold shares may hit temporary resistance near or slightly above this level. See my article, Bulletin: October 24, 2007 - What Now on Gold?
However, the last four years of generally rising equity prices may be the limit to what we see in the stock market, as market-leading inflation plays (including traditional commodity inflation plays) hit resistance for now in front of the investment pack. In addition, the likelihood of a left-leaning President being elected next year may keep a lid on the general market.
That said, we may indeed have a short grace period in the time before the election of rising stock prices due to the very positive effect of recent Federal Reserve Board consecutive discount rate cuts. Growth stocks may do well in the near term, given a temporary cresting in inflation hedges. I believe the long-term inflation genie is in the hands of Federal Reserve Chairman Bernanke.
I have written about a building danger of underlying inflation in my article, Inflation and the Stock Market: Does Anyone Remember the Seventies? Gold, as an inflation hedge has already doubled in price. Nonetheless, the bull market in gold may continue for some time given that inflation still seems to be building and given that the 1970's bull market in gold lasted ten years. Bear in mind that during the inflation of the 1970's there were two waves of increasing prices for gold, punctuated by solid declines in between waves in that measure of prices and in the value of inflation hedges. We may now similarly be in a temporary topping of the first wave now around $850 per ounce. Whether the fever breaks for gold and other hedges and cools for a while remains to be seen. But as they say in Las Vegas, the cards have been dealt.
This article contains the opinions and ideas of its author and is designed to provide useful general information to the reader on the subject matter covered. The author may or may not have current positions in the investments mentioned in this work, and the author may from time to time make investments in a manner that is not described here. Past investment performance is no guarantee or prediction of future results and any investments made, based on the opinions and ideas contained in this work, may or may not be successful. The strategies contained herein may not be suitable for every investor or situation, and the author is not engaged in, and should not be construed to be, rendering legal, accounting, investment advisory or other professional services to the reader or any other person. Readers should consult their own advisers for advice particular to their individual circumstances.