Wisdom of Salomon states that history repeats
By TERRY McCRANN
01apr01
FIRST, the good news. History suggests the US stock market should rise strongly over the next year. And if the US market went up, ours would almost certainly follow.
Whose history? Actually, research by US investment bank Salomon Smith Barney.
SSB says that in the past 70 years, every time official US interest rates have been cut three times in a row, the stock market has gone up – and sharply.
The average 12-month gain following the third rate cut is 18.3 per cent for the Dow Jones index and 17 per cent for the S & P, according to SSB.
So, given that Alan Greenspan has delivered the "charmed" third rate cut, SSB thinks the US market is primed for a 25 per cent rise by year's end.
There's one interesting – and a tad disturbing – exception to the "third-cut market-booster" rule: the Great Depression of the 1930s.
In July, 1930, the US Fed cut interest rates for the third time – but the Dow promptly shed a further 35 per cent over the next 12 months.
SSB argues the market will go up "unless one envisions an upcoming economic depression".
That's intended to dismiss the possibility of the market continuing to go down.
But what if it does? Would that announce we were heading into a depression?
Which, by the way, would have one minor benefit: it would completely override the very silly debate over whether two successive quarterly falls in GDP qualify as a "technical" or an "official" recession.
The Fed has cut interest rates three times in a row on 10 occasions since 1930, and every time the market has gone up (albeit by just 1.5 per cent in 1980).
The better news is that if we exclude 1930's reversal, the Dow's average rise over the succeeding 12 months is 23.7 per cent.
The one big qualification with the SSB analysis is that maybe this time "really is different".
This time, the mainstream US market might not have fallen far enough from what were spectacular peaks. And even though the Nasdaq has fallen more than 60 per cent, it still seems grossly over-valued.
So it would be wise to be cautious about assuming an automatic repeat of (post-1930) history. We might not need a depression to cause a replay of the 1930 market direction – just reality continuing to sink into tech-stock prices.
The bottom line is that the US market will rise at some point, but it would be wise to tread carefully until a clearer picture emerges. Once it does rise, investors must be ready to go long equities to catch the rising tide.
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