New Year, Same Environment

The more things change, the more they stay the same. This centuries-old aphorism seems more relevant to the economy and financial markets of the 21st century than to previous eras.

The elongation of both the business and equity market cycles, each interrelated to the other, is one of the great unwritten business stories of our time. Let's begin by observing that a 46-year-old who entered the labor force in late 1982 has seen only two statistically mild recessions in their working lives.

Fast forward to mid-December 2006, and the view is that the current bull market that began in either October 2002 or March 2003, take your pick, is running out of gas. It's now modern history's third-longest bull market run without even a 10% correction and a picture starts to crystallize.

Statistics that Risk-Controlled Investing editor Lou Stanasolovich provided me courtesy of Leuthold & Co. show a dramatic narrowing of the market's leadership in 2006. For the first ten months of 2005, the 25 largest companies in the S&P 500 were down 2.3%, compared with a 12.3% advance for a comparable period in 2006. In the same ten-month timeframe in 2005, the equal-weighted S&P 500 climbed 8.6% versus 4.4% in 2006. And the 200 smallest S&P 500 stocks rose 9.4% in the first ten months of 2005 versus 1.3% in the same period last year.
Anyone who remembers the Roaring Nineties can recall how that market became narrower and narrower as the bull continued to age. But these are all technical investing indicators that I've never totally trusted. Just like I'm skeptical when I read a Barron's article quoting seven leading Wall Street savants on why they are all bullish for 2007. Even more alarm warnings were triggered when a highly intelligent and often wrong seer, Merrill Lynch's Richard Bernstein, predicted the market will rise this year after wrongly opining that it would fall for each of the last four years.

But the real economy may offer more clues than Wall Street wonderland. And a soft landing a la 1995 is no longer a remote possibility. There is a recession in housing, but most of the damage is confined to the housing sector, much like the popping of the tech bubble in 2000 resulted in damage mainly to one sector. In 2000, technology and telecommunications represented nearly 40% of the market, so that was vaporized as well. Housing isn't that big. And other countries like England and Australia have sailed very smoothly through bursting housing bubbles.
Staying on the sunny side of the street, remember 2008 is a presidential election year. And ever since 1991, the equity market has climbed by 20% or more in the year prior to a presidential election.

And in reality, it's only one year. But, for a change, this month's issue had so little coverage of investing I felt someone had to say something about it. In the months ahead, you'll see a lot more content about investing but you'll also see more articles about the topics in this issue. One is marketing: why advisors don't do it, don't know how and still thrive, which will be a major topic at our Financial Advisor Symposium on April 19 in Las Vegas-now there's a place that knows how to market.

For now, take a look at Andy Gluck's interview with marketing guru Jaynie Smith on page 37. And have a great New Year.

Evan Simonoff