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“Doubt is not a pleasant condition, but certainty is an absurd one”


While the current long-term secular bull market that began in 2009 remains intact with broadening participation, doubters remain numerous and outspoken as the general stock market price advance enters its eighth year. Predictions of a market crash, if not Armageddon, are still pronounced daily with great certainty, proving once again that Yogi Berra was right: “It’s tough to make predictions, especially about the future.” Even the Federal Reserve Board that has, for months, predicted rising interest rates just around the corner, past the September meeting without a raise.

Our consistent message of positive progress is not a prediction, but it is recognition of the stock market dominant trend, well founded on historical bull market parallels and on gradually improving economic fundamentals.


Some technical market analysts have argued that this cycle is mature and at risk of reversing into a bear market at any time. While we believe this view is flawed and not supported by the data, it is worthy of analysis. We looked at one of the most enduring market cycles theories, Elliott Wave Principles. (Ralph Nelson Elliott – 1871 1948) The theory consists of five waves which, in general, appear to line up with the pattern of the current bull market advance: (See Chart on next page)

Wave 1 up – 2009 – 2011: The first wave occurs amid extreme pessimism with fundamental news almost universally negative. Sentiment surveys are decidedly bearish.

Wave 2 down – 2011: A sharp, but temporary broad stock market drop, with prices retesting the prior lows.

Wave 3 up – 2012 – 2014: News turns positive as earnings and market prices rise sharply. Corrections are short lived and shallow. While many investors remain bearish, “the crowd” often joins the bullish trend.

Wave 4 down – 2015 to 2016: Stock prices meander sideways for an extended period. While a good time to invest, the fourth wave is usually frustrating because of a lack of progress in the dominant bull market trend.

Wave 5 up – 2016 to 20??: Wave five is the final Elliott wave in the direction of the dominant trend. News moves from negative to positive and prices can move higher long after fundamentals no longer support prices. Volume is lower than wave 3 and various sectors begin to diverge with fewer stocks supporting the final highs in the Index before the market turns down.



Without a framework for fundamental analysis, the Chart above could be seen as a prelude to the end of an Elliott Wave Cycle, but the characteristics described in wave 5 are totally absent in 2016. Based on our indicators, we believe that it is safe to ignore dire warnings that: “The end is near.”

In fact, the path of least resistance for stock prices is a gradual move higher based on historic patterns and current fundamentals. Stock markets, worldwide, are rising for several reasons:

Equity investments are riding a wave of central bank liquidity creation that is continuing.



Supply of shares outstanding has been shrinking through stock buybacks, mergers and acquisitions.
Growth of new public offerings has been slow until the second half of 2016
Demand for stocks is growing:
Dividend yields on “blue chip” stocks now exceed those of high grade bonds.
Pension and profit sharing plans are increasing equities to help meet actuarial requirements.
Several nations’ sovereign wealth funds and central banks are increasing equity purchases.
Large cash reserves on the sidelines are expected to flow into equities.
The US economy remains on a solid footing.
Growing investor confidence will bring more public investors into stocks when interest rates rise and bond prices fall

Since 1940, If stock prices year-to-date are gaining in September, they have rallied into yearend 87% of the time (including election years), according to Tom Lee of Fundstat Global Advisors.


These fears probably will exist as long as the 2008-9 financial crisis is remembered.
While the U S and other central banks moved swiftly to provide liquidity to the banking system and the Fed provided guarantees that prevented “runs” on banks and other financial intermediaries, dealing with the buildup of sovereign debt remains a long-term work in progress. (See Chart above)
The second unresolved disequilibrium that remains to be addressed is the imbalances within international trade. There are three major creditor nations, Germany, Japan and China, which are accumulating large trade surpluses while most other nations are facing balance of payment deficits. The system functions through international capital flows and the US willingness to run trade deficits to sustain dollar denominated trade growth. These problems are well known and one of the areas where international cooperation is working well, but these imbalances remain unresolved and a risk to international financial stability.
We should take comfort in the progress made since the crisis and recognize that “capitalism – and its fractional bank reserve base” is a complex adaptive system that has brought prosperity to millions of people for over 200 years. There is reason to believe that policy makers will succeed in working through the aftermath of the 2008-9 crises, the latest of The Free Market System’s periodic challenges.


Stock valuation and return on investment are the most important considerations for investors. The chart below shows the current price/earnings ratios (PEs) of 17.3X for the S&P 500 Index compared to the 5 year average of 14.8X. Sector PEs range from 12.7X for Financials to 20.5X for Consumer Staples (excluding Energy at 43.1X due to the plunge in the price of oil). Among the sectors with above average growth are Financials (12.6X), Telcon (13.9X), Healthcare (15.9X), Materials (16.8X), Industrials (17.1X) and Technology (17.4X). These PE multiples are not out of line with forward earnings projections and certainly not in bubble territory. Most bull markets end with PE ratios in the mid to high 20s. When compared to the returns available from bonds, high quality dividend paying stocks represent prudent investments with attractive dividend income and capital appreciation potential not available from fixed income securities.


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