T'is the season to be jolly and jolly this past year has been. As one pundit declared that if you didn't make money in 2003 then fire your broker. Everywhere it has been green. So green in fact that it is enough to make you forget about 2000-2002. So just how green has it been? The TSX Composite is up 20%, the Dow Jones Industrials (DJI) 20%, the S&P 500 21.7% and leading the way the NASDAQ up 45%.
But in some individual sectors the gains have been even better. The sub indices of the TSX saw gains of 17% for the energy index, 17% consumer discretionary, 13% consumer staples, just under 22% for financials, 13% for Golds although they are up 54% from the March lows, 10% health care, 19% for income trusts, 16% industrials, 7% information technology, 19% for the materials index, a stellar 33% for real estate, 30% for telecommunications, 19% utilities, and the top performer metals and mining up 49%. Of course the Canadian Dollar was up 18% against the US$ (thus wiping out any gains if you were Canadian and invested solely in the US market) and commodities as measured by the CRB Index were up 10% to help the Canadian mining sector.
The markets managed to avoid four years in row down. That was last accomplished during the Great Depression with the dismal record of 1929-1932. We had noted in last year's forecast that years ending in 3 tended to be positive years. So in that respect 2003 did not disappoint. We were struck by the similarity of 2003 with both 1933 (70 years) and 1978 (25 years). We had noted last year that the 1978 cycle in particular as "this one bears watching". In 1978 the market was hard down into March then was followed by a strong rally into October. 1933 as well was down into March then rallied back into July before basically just chopping around for the balance of the year.
And so it was with 2003 with a hard down into March and while we acknowledged that new lows were possible that we thought if the "October (2002) lows were good then we will at worst see a severe test of these lows". Themes we thought would dominate in 2003 were Golds and energy. Golds, after getting through a severe shakeout in the first quarter did not disappoint and they led the way the rest of the year. While energy was not as strong it still put in a decent performance. The quick conclusion to Gulf War II played a role in bottoming the market in March coupled with the ongoing easy money policies of the Federal Reserve and another sharp increase in debt of all kinds.
So now we turn to 2004 and since it is a Presidential election year there are numerous pundits led by a certain US major brokerage analyst whose past record should have had her fired years ago but nonetheless is predicting that the S&P 500 will tack on another 17% again next year. But like the fools on the Titanic she is probably going to take a lot of innocent people down with her. Like the bubble of the late 1990's that culminated in 2000 we once again have the Federal Reserve leading the way with low interest rates, easy money and easy credit. So if we see a positive economy and a rising market just remember that it is built on an illusionary foundation that will crumble like a house of cards when the time is right. Just because it hasn't happened doesn't mean it won't it just has to wait the right time in the cycles. And when it does crumble it will take no prisoners.
For years I have been a fan of Michael Jenkins of Stock Cycles Forecast. I confess I can't hold a candle to him but I have learned hopefully something about cycles and have discovered that they do work but they are certainly never perfect. So with that knowledge we always like to look at the decennial cycles which in some form tend to repeat themselves over and over again often with similar themes dominating. Technical analysis is all about pattern recognition and patterns repeat themselves constantly so it is a case of looking for those repetitions.
Over the past 100 years there have been 5 elections in years ending in 4, 1904, 1924, 1944, 1964 and 1984. It was almost perfect as 1904, 1924, 1944 and 1964 put in up years with only 1984 acting as a spoiler with a down year. But we couldn't help but notice that 1903 and 1923 were down years, 1943 was up but it peaked by June and then spent the rest of the year falling, 1963 was the beginning of the great 1960's bull market coming out of a steep decline in 1962 so it was a strong up and 1983 was also a strong up year coming out of the early 1990's recession and market pause. With the exception of 1963/1964 then the market tended to do the opposite in the election year then what it did the year before.
This symmetry of opposites for election years ending in 4 is something worth noting as we go into the New Year. Over the past 100 years six years ending in 4 were up years while four were down years. Most notable up years were 1904 (100 years), 1924 (80 years), 1954 (50 years) and 1964 (40 years) the latter two during the great early years of the Kondratieff Spring while the most notable down years were 1914 (90 years – the market was suspended due to the war) and 1974 (30 years - a year notable for a devastating bear market) and both came during Kondratieff Summers. The remaining years 1934 (70 years), 1944 (60 years), 1984 (20 years) and 1994 (10 years) were generally flat years not being either up too strong (1934 and 1944) nor down too strong (1984 and 1994).
One characteristic we did note that with the exception of the strong directional years of 1954, 1964 (both up) and 1974 (strong down) the markets tended to be weak into the first quarter sometimes stretching to the second quarter and stronger in the latter part of the year. One final characteristic that was also noted that with the weakness seen in many of the years in the first half of the year the high was made almost in January and no matter whether it was bull or bear years. The exceptions were the powerful bull markets of 1954 and 1964 where it was lows that were made in January and 1944 which had a strong first half with a low in November/December 1943. If the high for this cycle does not come in December it will come in January.
The other cycle worth mentioning is the 25 year cycle, which as we noted, appeared to be the dominate cycle this year. 1979 was dominated by themes of rising commodity prices, sharply rising gold prices, rising energy costs, a falling US Dollar and falling bond prices (yields rising). Curiously we see these themes as being dominate again for 2004. While overall the market was generally flat for the year (1979) it was notable for a sharp decline in the first quarter, a rally into April followed by a shallower decline into the summer then a good rally into October that culminated in an 11% decline into October/November a soaring gold market and a devastating bond market collapse in conjunction with the falling US Dollar.
America has become the land of illusion where real jobs are scarce dominated as it is with McJobs and Wal-Mart greeters and the industrial sector increasingly hollowed out with jobs migrating primarily to China and India. Even former solid white collar jobs in software and technology call centres are migrating to India. Malls seem to be in endless sales where 50% off not only seems normal its high, cars are 0% financing and the average American household owns 2.4 cars most likely gas guzzling SUV's. Everyone has mortgaged their houses to the hilt expecting the housing boom to never end and instead of using the mortgage funds, often to 110% of market value, to pay down debt it is used to buy more televisions, cars and electronic equipment. Corporate profits are razor thin as everyone has to compete with Wal-Mart.
If the US$ dollar wasn't falling to compensate for the decline, oil and other commodity prices would probably rise anyway as demand soars in China and India. The mortgage companies led by Freddie Mac and Fannie Mae, despite record mortgages being handed out, are also regularly recording record delinquencies and bankruptcies just keep on going up never down. What does one expect with record debt and a record debt bubble.
If there is one bright spot it is here in Canada and other places where junior mining and junior oil and gas companies are raising record amounts of cash with the high gold and other base metal commodity prices and rising oil and gas prices. That ensures that there will be a lot of drilling going on next year and we suspect that a boom in these junior resource companies that could last 2 to 3 years is just around the corner. That doesn't mean there can't be drops in the price of gold and other base metals and subsequent weakness in the companies but if the weakness in the markets comes in the first quarter as we suspect then that may be the time that these companies experience weakness as well. But signs of strong accumulation have been going on for months and any weakness will be an opportunity to accumulate further.
It would be nice to think that the market rise in 2003 will continue into the election year of 2004. But evidence does not support this especially for the first half of the year. If the pullback is normal it will correct at least 2/3's of the up move but if we were to return to the bear market that has not left us since it started in 2000 we will see record lows. The drop will be precipitated by a US Dollar crisis and that means that stocks and bonds will fall but gold and gold stocks will soar. And finally despite the recent capture of Saddam Hussein the terrorist attacks will not stop and the risk remains for an event in the US. Be wary of 2004.