Plan to celebrate
Dow 10,000 by the
Millennium year

by Yale Hirsch
Smart Money

As I gaze into my crystal ball for his thirteenth annual forecast, he noted that this powerful bull cycle has had no respect for historical patterns:
Seventh years of decades have been poor performers in this century. Two exceptions, both pre-election years, were 1927 (up 28.8%) and 1967 (up 15.2%). This year at its high was almost as good as the 1997 market, despite the usual handicap of being a post-election year.
Bear markets tend to begin in post-election years following reelections of presidents. The intermediate market top on August 6th could have been the start of a bear market, but the Dow doesn't seem to be ready to throw in the towel yet.
Back-to-back annual gains of over 20% each have always been followed by losses or paltry gains in the third year. However, for the first time in this century, or even in the history of our stock market, the market has had three great years in a row, posting a 22.6% gain in '97.
To gain perspective, we looked at historic patterns and calculated the percent loss (in the table below) between the post-election year high and the low in the following midterm year. The average loss was 22.1% in this century.
Note that there were only single digit losses early in new bull cycles, as in the 20s and 50s. In the current big bull cycle, which began 1982, you can see a fairly low Dow in 1986 and 1994. With a much higher Dow now, one might surmise that things could get worse before they get better. Could the recent 13.3% drop between August 6th and October 27th be all the correction we are going to get? Is the Southeast Asian economic crisis fully discounted already? Will the market continue to ignore the fact that stock prices are at their highest price/earnings ratios, and dividends at their lowest yields?

As the economy and the stock market have operated on a quadrennial cycle for over 165 years because of a presidential election every four years and the ability of the "ins" to prime the pump at the appropriate times, major corrections do tend to occur in the first or second years of a new term.
In the last nine midterm election years, bear markets began or were in progress six times in a row before the onset in 1982 of our current biggest bull market cycle in history. Since then we experienced a bull year in 1986, a Saddam Hussein-induced bear in 1990 and a flat year in 1994. Will we hit 10,000 on the Dow in 1998, ignoring the Asian mess, making it an unprecedented four great years in a row? Or, will the battle to take over or retain Congress keep the Wall Street bulls at bay in 1998?

Ten Factors Feeding The U.S. Bull Market

This bull market cycle has moved up tenfold in only 15 years and ten months. The other three tenfold moves in this century took 22 years on average. Despite the currency devaluations in Southeast Asia and the gargantuan bailout required, this powerful bull may still have lots of ammunition left. Here are ten extraordinary bullish factors:

1. Real peace among major powers. This is unprecedented in history, if you think about it. Defense outlays as a percentage of total receipts of the Federal Government have shrunk in half since 1988's figure of 32%. This is happening elsewhere in the world.
2. War between Capitalism and Communism is over. Nearly two billion communists in the Soviet and Chinese blocks have been converted to capitalism in the largest mass conversion in the course of civilization. A gigantic opportunity for American companies.
3. Low interest rates moving even lower. U.S. deficits shrinking means less borrowing by Uncle Sam and a boon for consumer and corporate borrowers. It also means more money to spend by consumers and more profits to companies.
4. Cheap energy. OPEC crippled us by its action in November 1973 and threw the world economy into the tank for a good ten years. That's over along with high oil prices, horrendous inflation, and out-of-sight interest rates.
5. Modern inventory management. Whatever happened to all those National Bureau of Economic Research charts of economic indicators with thick vertical lines showing the periods of recession that came around every four years or so? A stack of unemployed verticals is gathering dust in a closet somewhere. Our shift to a service and information-based economy may have also helped make the boom/bust cycle disappear. No recessions in 15 years (excluding 1990's caused by Saddam Hussein).
6. A leaner and meaner corporate America. The industrial restructuring we went through in the last two decades has made us better competitors. Southeast Asian devaluations will make their goods cheaper and ours more expensive. This will surely put us to the test, and hopefully, we'll be able to handle it.
7. Merger mania. We've lost track of all the mergers and buyouts. Seems as though a trillion dollars worth of common stock has disappeared in the last year or two. Decreasing supply means increasing demand and higher prices. This doesn't include the massive buybacks of their own shares by many corporations.
8. Computer chip power is still doubling every 18 months. What a boon to world productivity. The whole world must computerize and the computer revolution is alive and thriving. Everybody in years to come will have to have a computer.
9. From wired world to wireless world. Once you get a cellular phone you wonder how you ever did without it. The Iridium global satellite network will be up next year. Others coming will soon provide seamless connection to the information structure anywhere on the planet. Mindboggling! It still seems strange seeing someone walking along and talking on a cellular phone, especially when it's your spouse.
10. Internet, Internet, Internet. First came newspapers and magazines, the print media. Then came radio, the live sound medium, followed by over-the-air television, the live visual medium. We've also had a century of telephones, movies and phonographs.

The last half of the century has seen the computer revolution. And now here comes the Internet, with enormous potential, that is still difficult to grasp. Yesterday, we moved our mouse and clicked on several places and suddenly we were watching President Clinton live at his press conference on our computer from the Internet. We are arranging to make face-to-face telephone calls on the Internet. Our world is changing all around us and it's an exciting time to be alive!
Another great bullish event is the start of a new decade. More thrilling is the anticipation of a new century. Few inhabitants of this planet get the opportunity to usher in a Millennium. As 2000 approaches, you can feel the human spirit being lifted.
In the 1994 Stock Trader's Almanac we were bold in saying the "Dow could gain well over 1000 points from its 1994 low to its 1995 high." As you can see in the table below, the Dow gained 1623.12 points. The most spectacular gains in this century have occurred between the midterm lows and the pre-election year highs, the average being 50%. There was only one puny gain of 14.5% which occurred during the industrial contraction after World War II. Problems with OPEC and Iran in 1978, an economic collapse in 1930, Vietnam in 1966 and Kuwait in 1990 held the market down for these four low gains. If the situation in Asia worsens and brings the Dow down to 6000 in 1998, a 50% rise by 1999 would move it up to 9000. If we only drop down again to test the October 27th low near 7000, the average rebound would take us back to 10,500 in the following year. And if we go no lower than 8000 in 1998, then the possibility of 12,000 on the Dow exists for 1999. Time will tell!
This year's forecast has been the most difficult to make in the past 13 years. What impact Southeast Asian problems will have on us is still unclear. We recall the flatness of midterm 1994's stock prices and the bear of 1990 (Thanks, Saddam). Though 1986 was up 22.6%, the Dow gained no ground in the eight months between mid-March and mid-November.

1998 Forecast

Going against the most powerful bull market ever ain't easy. The Dow could make a new high sometime in the first quarter, but we can't see it going further. Then, with midterm politicking beginning and Asian realities setting in, we'll be testing last October's low and possibly fall into the 6500-7000 range. From 1998's bottom, the biggest ever midterm-to-pre-election year Dow point gain will begin. Plan to celebrate Dow 10,000 by the Millennium year!

Editor's Note: Yale Hirsch is editor of Smart Money, P.O. Box 2069, River Vale, NJ 07675, monthly, 1 year, $120. The Bull & Bear highly recommends the 1998 edition of the Stock Trader's Almanac. The thirty-first edition of the annual Stock Trader's Almanac is a one-volume stock market databank that focuses on dozens of profit opportunities throughout 1998 based on proven historical patterns. It informs investors of the best times of the day, week, month, and year to buy, and the Almanac also warns when the stock market is most dangerous. This little-known calendar edge is enough to make a major difference in long-term investment results. The 1998 Stock Trader's Almanac is a combination market encyclopedia, forecasting tool, portfolio record keeper and desk diary. The 192-page edition is available for $34.90 post-paid directly from the Hirsch Organization Inc., P.O. Box 2069, River Vale, NJ 07675-9069. Or call 1-800-477-3400.

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