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I’ve been bombarded with the following question: “Larry, what gives with the stock market? First, it fell hard, just like you predicted, but now it’s made new record highs!”
Today I want to answer that question. And I’ll also tell you why, even in the best-case scenario, you’ll still come up short by investing in U.S. stocks …
The Three Scenarios I See
For the U.S. Stock Market …
Scenario #1: Dow Decline Starts Anew (Most Probable) — Under this scenario, the recent rally in the Dow to new highs was nothing more than a knee-jerk response to the Fed’s deep slashing of interest rates. Once the celebration ends, the market turns back down with a vengeance.
I think this is the most probable scenario because none of the problems that I’ve been warning you about … the real estate and mortgage crises, the credit squeeze, the falling dollar, inflation, and more — have been cured by the Fed’s easy money policy.
At best, they have been temporarily papered over, and the market has been given a psychological reprieve that will fade away.
The simple fact is that the U.S. economy is not doing well, even considering the surprisingly strong job growth numbers we recently got.
It’s also worth noting that my technical indicators support a new Dow decline as the most likely outcome.
Scenario #2: Sideways, Choppy Market (Less Probable) — In this scenario, the Dow and other major stock indices would enter a protracted period of wild swings within a wide trading range.
Sideways markets are always hard to forecast, but if this were to occur, I would expect the Dow to swing back and forth roughly between 12,000 and 14,000. That sideways movement could last for months.
Although they’re full of trading opportunities, sideways markets are extremely difficult to master. Most investors just get chopped up in this kind of market.
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Scenario #3: New Bull Market in Stocks (Least Likely) — I can’t see this scenario happening. Not with all the underlying problems the economy is facing. As I mentioned earlier, the real estate crisis has not been resolved yet. Credit conditions are tough. Inflation is jumping. And the list goes on!
But I will tell you this: If the Dow and other broad indices continue to rally and enter what many will consider a new or renewed bull market, it will be for one and only one reason: Because the dollar is plunging and stocks are taking on aspects of an inflation hedge.
In other words, stock prices would try to rise to offset the declining purchasing power of the dollar. This has happened before, in the aftermath of WWII, and again in the 1970s. So there is precedent for it.
However, to see net gains in real terms, stocks would have to rise at a much faster rate than the dollar is declining, and faster than the rate at which commodity prices are rising. Otherwise, the broad market will continue losing ground to inflation.
And that brings me to my most important point today …
It’s Possible to Lose Money in Stocks
Even When They’re Going Up!
Let’s start with a question: How much money will you make if the Dow were to rally 10%, to say 15,400, but the dollar’s purchasing power were to fall by another 15%?
Answer: You wouldn’t make any money. Quite to the contrary, you’d be able to buy 5% less stuff with the proceeds of your investments!
Sound crazy? Well, this is precisely what has been happening for the last seven years! Indeed, so much so that …
Since its peak in January 2000, the Dow has lost as much as 68% of its value in terms of most other assets!
Let’s say you bought all of the stocks in the Dow Jones Industrials on January 3, 2000. And for simplicity’s sake, we’ll just say you paid $11,357 (the index’s value in dollars) for the whole lot.
Now, fast forward to today, with the Dow hovering around 14,000. In pure nominal terms, the index has gained 2,643 points since January 2000, or 23.3%.
Never mind just how lousy that is when you consider it translates to an average annual return of just 3.32% over seven years.
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Instead, compare the Dow’s measly gain to the performance of a basket of commodities (in this case, the Commodity Research Bureau’s CRB Index).
Dow’s gain since January 2000: 23%
CRB’s gain since January 2000: 307%!
Translation: Your dollars have lost so much purchasing power as measured by basic items such as oil, sugar and cotton that instead of a 23.3% gain, the Dow’s real, inflation-adjusted value over the last seven years is actually a 68% loss!
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So if you think you’re making money in the Dow as it’s rallying, think again!
Bottom line: Even if I’m wrong about the Dow and it continues to rally, your best bet is to stick with real inflation hedges!
I’m talking about good old-fashioned commodity stocks … based on real assets … creating real wealth.
Oil, gold, natural gas, copper, nickel and coal producers. Agricultural firms that deal in wheat, soybeans, corn, coffee, and cocoa.
Companies like China Petroleum and Chemical (SNP) … Aluminum Corp. of China (ACH) … and Northgate Minerals (NXG) … where my Real Wealth Report subscribers have seen gains of as much as 107% … 143% and 272%!
These investments thrive in inflationary times because they are dealing in commodity and hard assets.
Plus, they are supported by the other macro forces I’ve been telling you about. Namely, the three billion people in China, India and the rest of Asia — nearly 50% of the world’s population — that are rapidly catapulting themselves into modern society.
I consider this force so powerful that I’ll be off to Asia in a couple weeks on another front-line trip. It’s the best way to keep my fingers on the pulse of what’s happening there and to find some hot new profit opportunities.
So stay tuned!
Best wishes,
Larry
P.S. So much is happening so quickly and the urgency of reaching you is now so much greater … we’ve decided to take a giant leap forward and create for you a brand new, vastly expanded, Money and Markets website.
It will go live online tomorrow evening! So for the highlights and a brief guided tour, make sure you read our regular Money and Markets issue coming this Saturday.
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, and Julie Trudeau.
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