Stocks: the Long Road Back

Jason Zweig's column in The Wall Street Journal drew comment on CNBC and elsewhere yesterday. Zweig notes that one student of long-term investment returns, professor Elroy Dimson of London Business School, "estimates that we'll have to wait nine more years before the Dow average, including dividends, has a 50% chance of hitting its 2007 highs."

Fred the Intelligent Bear thinks it's too soon to talk about the road back. He's still focused on the road down, as shown in this chart. (Caution: Fred produces interesting charts but massages the data. Read the fine print.)

If professor Dimson is right, we'll have to wait until 2018 before we even start dreaming of new highs for the DJIA.

2018? That year rings a bell on this blog. One of our first posts highlighted saros cycles. Those cycles run about 18 years: one up, the next down, then up again. They seem to match up roughly with the performance of the stock market since World War II. The last up cycle ended in 2000. Our current down cycle should end around 2018.

The Dow's cycles are easier to spot when adjusted for inflation. In the chart below, you can see how punishing the 1970's really were.