Long Term Stock Market Cycle: Where Are We Now? ~ market folly

Monday, October 11, 2010

Long Term Stock Market Cycle: Where Are We Now?

This morning, Market Folly's quote of week focused on wisdom from value investor Joel Greenblatt. A few sentences in particular stuck out where Greenblatt says:

"Over the long term, despite significant drops from time to time, stocks (especially an intelligently selected stock portfolio) will be one of your best investment options. The trick is to GET to the long term. Think in terms of 5 years, 10 years and longer."

Given his commentary, the chart below is a perfect illustration of "the long term." This chart, courtesy of DecisionPoint (via Cynical Advisor) depicts how the stock market has traded in 16-18 year bull/bear cycles ever since 1932.

(click to enlarge)

Currently, the market appears to be in the bear cycle where it essentially chops sideways via wild oscillations every few years. By the chart's calculations, this means the market will be stuck in its current cycle for another 5-7 years before entering another bull cycle. This of course assumes the current trend of alternating cycles remains in tact. Focusing on the drawn-in trendline, a break below the level of 500 on the S&P would obviously be quite a negative signal jeopardizing the multi-decade trend.

In the end, this chart simply illustrates Greenblatt's notion of "long term." In a day and age when everyone is so focused on short-term performance, hopefully this forces you to take a step back and examine things from a multi-decade perspective. While the current trend is choppy to say the least, the long term trend is most definitely up. The problem for most investors though is the lack of ability to remain on course. Whether it be poor market timing or succumbing to emotion, investors have time and time again found a way to deviate offtrack.

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