Pick your pundit. 2006 will be:
(a) Based on earnings and valuations, Great
(b) Based on valuation and profit growth decline, Volatile but rising, creating buying opportunities
(c) Based on manufacturing sentiment (ISM)Hohum
(d) The onset of winter
And now, Mercury Rising's own economic prognosticator, Charles, will take his stab at it:
Wile E. Coyote left the clifftop five years ago. Because of the massive trade and government deficits, we are pretty sure where he will end up, but the precise path down is uncertain. And, of course, in economics as not in cartoons, it's always possible that he might make it across the canyon.
The question is when he will glance down. Investors do not seem to have noticed that the Dow is where it was five years ago. What that means on practical terms is that stock values have declined by ca. 20% due to inflation. By my reckoning, that puts the Dow at a reasonable level.
But: reasonable only in local dollars. So many dollars have been pumped into the global system that the logical ways for a correction to occur are through (a) inflation, which seems to be happening in a manner not captured by the official inflation index, and (b) currency decline. Investors in gold and commodities (the usual inflation hedge) have not been disappointed. Investors in foreign markets have also done quite well. What is happening is a slow cancer, in which American technological supremacy erodes to serve the needs of the present.
So, I predict that the Dow will continue to decline in purchasing power equivalent. Gold, oil, basic commodities, foreign investments will continue to do well. Investors able to maintain liquidity may be able to scoop up bargains if the pathway of the decline is steep. Of course, they may alse be the worst burned. In 1929, there were buying opportunities, too.
The Wile E. moment comes when investors ask why they should keep their money invested in equities whose real purchasing power is steadily declining, with no prospects of a change. My guess is that at about the time as the Bush presidency no longer becomes viable, the financial Rumsfelds will say, "Sweep it all up." At that moment, there will be a major correction, maybe 20 or 30%. But it still might not be a buying opportunity.
Any suggestions for socially-conscious investors who refuse to make their livelihoods from gold and oil?