Your Market Roadmap to the Next Five Years

What are your personal goals?

Maybe you aspire to travel the world…or perhaps to study or get in shape.

You might be considering starting a business. Many people say this is their life’s ambition. There’s nothing quite like the challenge of building something from nothing.

For many, the primary goal is to raise a family and enjoy their grandchildren. I have four kids of my own. Being a good parent is an aspiration for most of us.

Our goals are as many as they are different. Some are easy…others hard. But they all have one thing in common. Goals make life interesting. They challenge us to keep moving forward.

I’m in the process of fulfilling a goal now. As I write, I’m 38,000 feet above the Southern Ocean. The skies are calm. Perth, my destination, is still a couple of hours away.

The turbulence-free flight is in stark contrast to the markets. I’ll talk about this in a moment. I’m going to show you some research to help gauge if a crash is imminent.

But first, let me briefly tell you what I’m up to.

Staying the course

One of my favourite pastimes is running. I’ve been lacing up the joggers for years. It keeps me fit and active. I also enjoy the challenges that racing brings.

18 months ago, I set myself a big goal. I wanted to compete at the World Masters Athletics Championships. The aim was to run my fastest 1500 metres since I was a schoolboy.

World Masters is big — 4,026 entrants from 91 countries. It’s also highly competitive. To win a medal you need to be exceptional. Some of the performances are simply breathtaking.

Doing well at anything requires lots of planning. You also need to persist when times get tough. In this sense, running and trading have a lot in common.

Take my training for instance.

Running on a mild, sunny day is beautiful — it’s very easy to do.

But conditions aren’t always perfect. Some days are terrible. There’s no joy running intervals in the rain on a freezing July morning. Although, to reach my best, I know sticking to a plan is vital.

This emotional rollercoaster may sound familiar. It’s a lot like trading.

Bull markets can make anyone feel like a pro. Making money can seem effortless. But bear markets are another matter. These quickly separate the contenders from the pack.

The markets are currently testing every trader’s resolve. Volatility is often nerve-racking…your goal of trading successfully can seem a million miles away.

But don’t let this stop you. Now is the time for persistence and having a good plan. It also helps to be objective. Above all, remember what you’re trying to achieve. That’s how I stay the course.

OK, let’s get to the question many traders are asking…

Crash or correction?

I’m going to start with a comment from a prospective member. I was sent this message last week. The sentiment sums up much of the commentary I’ve been seeing recently.

Have a read below…

…if next year is a bear year — likely — there might not be any signals at all. Do you agree?

It is highly likely you won’t have anything much to send us in the next few weeks as the US elections are likely to send markets down quite a bit more than they have already dropped.

Linda, prospective member

It always amazes me when people talk with such certainty. And it’s not just everyday people. Many experts use words like ‘when’ and ‘will’ when expressing their views.

Here’s an example…

When the bond market breaks, when that bubble bursts, it will wipe out every asset, everything will collapse together…

Michael Pento, Pento Portfolio Strategies

Yes, things could get a lot worse. You can never rule out the possibility of a crash — or even a year of weakness. Just about anything can happen in the markets.

But I believe a rigid viewpoint is a mistake. This type of all-or-nothing mindset can put you on the sidelines indefinitely. Waiting for the worst can be expensive if it doesn’t happen.

I have two charts to show you this week. My aim isn’t to prove the bears wrong (they could be right this time). The point is to provide some balance to the recent negativity.

The charts are from one of my favourite analysts, Rod Smyth. He’s the chief strategist at RiverFront Investment Group. He publishes a free commentary called The Weekly View.

Last week’s edition had some fascinating research. The focus was on the market risk, relative to the long-term trend.

Take a look at this…

Source: Riverfront Investment Group
Click to enlarge

The graph shows the performance of US large-cap stocks. It goes back to 1926, and includes thousands of companies. The growth rate is after adjusting for inflation.

You’ll see a straight gold line on the chart. This is the long-term trend. RiverFront calculates the trend line is rising at 6.4% per annum. Yearly returns naturally vary.

Now have a look at the market’s current position. Smyth and his team estimate that prices are fractionally above trend. This puts stocks right on their long-term average.

This is an interesting chart to study. The big bear markets typically begin from well above trend. The 1987 crash is an exception. But historically, the present doesn’t look like a runaway market.

RiverFront has another chart I want to you to see. You may need a few moments to get your head around this one. But it’s worth taking time to consider. I’ll explain what it means in a moment.

Here’s the graph…

Source: Riverfront Investment Group
Click to enlarge

OK, let me explain what’s going on.

Each dot represents the average annual return over five years (you’ll see the percentages on the left). The start date is 1926, and the calculation is done each month. For example: June 1926 to June 1931, then July 1926 to July 1931.

The bottom axis puts the returns into perspective. It tells you where the market was, relative to the trend, at the starting month. You’ll see there’s a vertical line at 0%. This indicates when the market was at trend (like now). To the left is below trend (for example: 2009); to the right is above trend (e.g. 1999).

Notice how the returns are generally low on the right? They then gradually curve upwards to the left. The periods to the right were when the market was above the gold trend line.

Historically, the best periods are in the green box. This is when the starting point was well below the trend line. The worst times were when prices were considerably above trend (red box).

So, where are we now?

You’ll see a blue oval shape towards the middle. That is the market’s current position — right on trend. The outcomes, when the market is on trend, are mostly positive.

Remember, this study is looking at long-term trends. The performance periods are in five-year blocks. This is not a good guide to what will happen over the next few months.

But the message is no less important. The historical backdrop for a major bear market is not in place.

No one can say if these trends will persist. The future could prove very different to the past — nothing is certain. But 90 years is a lot of history. I believe the odds favour the trend.


I’ve returned home following the World Masters. It was an amazing experience. I got to wear the green and gold in competition. It’s as close as this 46-year-old will get to feeling like an Olympian.

So how did I go?

Well, I set a range of goals. The ultimate achievement was to win a medal. Next up was to run a personal best time. Third on my list was to reach a final.

A medal wasn’t to be. But I won my 1500 metre heat. That got me a berth in the top 16. I wasn’t expecting this victory — that was a bonus.

I didn’t contest the final. I made a strategic call to rest before my last event — the steeplechase. This is a gruelling 3000 metre race with 28 waist-high steeples and seven water jumps.

I came ever so close — fourth place. My strategy almost got me onto the podium.

Was it worth 18 months of effort? Absolutely.

Setting goals is what life is all about. It wasn’t easy. There were times of self-doubt…times when I thought it couldn’t be done. But I got there. Persistence won the day.

You may be finding the markets equally challenging. That’s normal. Volatility will test even the most confident traders. But difficult conditions pass. The key is to keep yourself in the game.

Until next week,

Jason McIntosh,
Editor, Quant Trader

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PS: Quant Trader sources all images and charts above.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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