The mainstream financial media has repeatedly stated over the past couple of weeks that they've been confused by the supposedly "unusual" volatility in the major stock market indices.
I've found those comments rather amusing because my experience suggests that the market's recent volatility is actually quite normal for the current phase of the business cycle.
More importantly, my research indicates that the recently wide daily swings in stock prices are nearing an end and that stocks will trend substantially higher after the Nov. 4 presidential election.
That forecast is based primarily on the following:
(1) The housing market appears to be bottoming, with sales of existing homes trending higher over the past three months and inventories of new homes falling to their lowest level since June 2004.
(2) Both long-term and short-term borrowing rates have recently fallen in response to the Federal Reserve's monetary activities and measures taken by central banks around the world to unclog the credit markets and to restore investor confidence in the worldwide financial system
(3) An increasing number of government officials, including Federal Reserve Chairman Ben Bernanke, are currently discussing ways to stimulate the economy, including measures to help improve access to credit by consumers, home buyers, and businesses; temporary tax breaks; money for roads, bridges and other infrastructure projects; aid to cash-strapped state governments; and funds for food stamps and for unemployment insurance.
Although I expect economic conditions in both the United States and in most foreign countries to worsen during the next six months, the majority of leading economic indicators that I follow suggest that the current U.S. recession will end during June 2009.
That would be a very important development for the following reasons:
(1) The primary indicators that the National Bureau of Economic Research (NBER) uses to determine the beginning and end of recessions indicate that the current U.S. recession probably began during the fourth quarter of 2007.
(2) Most recessions last for approximately nine to 18 months.
(3) Stock prices tend to bottom and then turn higher approximately half way through recessions, as astute investors focus on likely future economic developments rather than current economic conditions.
Meanwhile, U.S. mutual funds experienced their largest cash outflows during the past six weeks since September 2001, and numerous investor sentiment indicators suggest that that most investors who were considering selling their equity holdings have likely already done so. Those are very significant developments, since they mean that few potential sellers remain to push stock prices much lower.
I therefore urge you to ignore the gloom and doom that dominates the financial media and to instead focus on future developments.
With the U.S. government likely to support the Fed's monetary stimulus with significant fiscal stimulus initiatives, I expect stock prices to zoom ahead, shortly after the elections.
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