Dent on the Decennial

01/14/2005 12:00 am EST


Harry Dent

Author, The Demographic Cliff

While many advisors focus on next week, month, or year, Harry Dent, author of The Roaring 2000s Investor, offers a decidedly long-term view. Here, he looks at the Decennial Cycle, and his outlook for stocks for both the year ahead and for the rest of the decade.

"The Decennial Cycle is one of the most fundamental and proven market indicators. In sum, the fifth year of the decade has been the strongest on average of any year, and over the past 100 years, the fifth year has never been down. This is a cycle to take seriously, and it would have avoided the most severe crashes of the last century, except 1973-1974. This cycle calls for being cautious in the first 2½ years of each decade as corporate consolidation tends to set in and the markets tend to be down. But the biggest insight from this cycle is that the markets tend to be much stronger in the second half of the decade and the 5th year tends to be the strongest year. So, this cycle alone would be calling for much stronger markets from 2005 to 2009.

"But like all cycles this one is derived from averages of stock returns over the last 100 years, and hence it doesn't work out the same way in each decade. So what we wanted to do here is to take a closer look at this cycle and see how consistent it is. To do so, we look at the annual returns for the S&P 500 in years zero through nine in each decade over the last century. Overall, the zero year is the worst with seven out of ten years with negative returns and an overall return of -3.49% for all zero years. 1950 was the only decade that didn't see a significant correction sometime within the zero year. On average the worst average return (down 4.43%) is in the seven years. The one and two years also tend to be low on average and have a number of severe crashes like 1921, 1931, 2000, and 2002. Outside of the seven years, most of the negative returns occur in the first half of the decade. On the flip side the five year is the best with average returns of 26.75% and with no negative years. The eight year is the next best with 20.23% average returns and only one year that was very slightly down.

"The most important overall insight is that almost all of the returns on average are made in the second half of the decade. I n fact, the Decennial Cycle basically says that you would have never lost money in the second half of any decade in the last 100 years and that the lion's share of gains for each decade were made in the second half. Therefore, it is very unlikely that we will see a bad market in the next five years. In fact, it is very likely we will see at least a good market. This Decennial Cycle says that 2005 should be a strong year and that 2005 to 2009 should be a very favorable period for stocks. Indeed, stocks should perform very well in the current cycle given the unusually strong drop in 2000 through 2002.

"Meanwhile, here’s our outlook on stocks for the coming year, which we expect to be the next wave up. There is very strong resistance at around 11,300 on the Dow. Then there will be more resistance at 11,720 to 11,910 at the all-time highs from January of 2000 as we move into the spring We would expect that we test the all-time highs between March and April and then break through to new highs in the summer of 2005 with a stronger second half to follow. The NASDAQ should see substantial resistance at 2,310 to 2,330, which we are likely to approach in the near-term as the Dow tests 11,300. Although we don't expect a break out to new highs on the NASDAQ until 2007, a rise to the next major resistance at 2,870 should come late in the year consistent with the Dow reaching as high as 14,000."

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