Stock Markets Could Be Flat For Years

Colin Cieszynski, an analyst with CMC Markets Canada says that the current stock market rally is running out of steam and will be followed by years of stagnant trading:

Mr. Cieszynski followed previous bear-market rallies as well as stock performance during long periods of equity stagnation to illustrate that North American equity markets in years ahead are likely to be constrained.

For example, in 2003, the most recent year a major bear market came to an end, the Dow Jones index rallied in the spring and continued to climb through the end of the year. But after the initial big rally, the index traded between 10,000 and 12,000 for the next two years.

The same could happen in 2010 and beyond. Stocks may rally a little more, but afterward they are likely to face extended consolidation, including equity values getting ahead of earnings and bumps on the road to recovery like sovereign debt bombs (e.g., Dubai), as well as interest-rate hikes.

"Cieszynski also sees parallels between the decade gone by and 1966-1982, the last major period in which stocks were stuck in a tight trading range. For all of its drama – two major bull and bear markets over the last dozen years – the most recent decade was such a period, during which the Dow ended 4.9 per cent lower than it started.

Both periods follow similar patterns, hitting their major bottom in their eighth year. In the earlier case, beginning in 1974, markets recovered for seven months, then consolidated for five and had one last rally, rolling into 1976.

If this time is similar, we have now entered a consolidation period that could be followed by a rally to lift the Dow to 11,000 in the spring. But if the parallels hold, for the next several years investors could also be facing the same range-bound trading that prevailed from 1976 to 1982, when stock traded in a range of 800 to 1,000, Cieszynski said.

Not least, after finally breaking out of their range in 1982, stocks have had significant sell-offs every four years or so afterward. The 2007-2009 bear market appears to be the 2006 sell-off delayed, suggesting 2010 may be a period of weakness". (Financial Post)