Stocks Soar and Economy Booms but One Country at a Time the Great Bull Market is Ending

March 8, 1999

The U.S. financial markets soared Friday when the nation's employment numbers showed a strong economy with near-full employment, but not strong enough to prompt the Federal Reserve Board to tighten interest rates. A surge in the Nonfarm Payrolls number reflecting the creation of 275,000 new jobs was on the low end of expectations for the robust number, and the manufacturing sector contracted again.. The U.S. unemployment rate, which was expected to drop slightly to 4.2%, actually rose a tick to 4.4%. That number was higher than expected, and gave bond traders a reason to conclude the Fed will not tighten credit any time soon, perhaps not at all during 1999, due to its implications for a slowing economy.

Coming only a day after Germany announced its economy is contracting, and only months after the Asian, Japanese, Russian, and Brazilian economic crisis, the Unemployment Report in recent months has shown surprising strength within the U.S. economy. But Friday's number gave both the stock and bond markets something to be excited about, and they rallied in synch with each other in a big way for the first time since the global economic crisis accelerated in 1997. Due to flight-to-quality buying of U.S. Treasuries during the global crisis of 1997 and 1998, bond prices had moved in the opposite direction as stock prices until recently. Friday's number also saw a minimal increase in average hourly earnings to $13.04 in February, which helped keep inflation worries at bay. Fed Chairman Greenspan has made it will known in recent months that he is watching that hourly earnings number closely. Still, the U.S. now stands virtually alone in its economic boom. This, the stock market has recognized, as have bonds, which have declined enough recently to reflect a full percentage point rise in interest rates since last October's financial market lows. The Fed, it still appears, is content to maintain steady monetary policy and to allow the free market to tighten credit instead.

Given all the factors motivating the investment markets, and given that the U.S. stands virtually alone in an economic boom, a look at an important aspect of the big picture is in order here, especially with respect to the bull market cycle in stocks which has been in force most of this decade and has its roots in the 1980s. Back in 1997, our monthly market letter, The Global Market Strategist®, observed that a typical long-term bull market cycle is global in nature but that when it ends, it ends one country at a time.

For example, we pointed out that, typically, emerging countries drop off the list of equity bull markets first, then later other lesser developed countries end their bull markets. Later, major economies begin to drop off the list to the point at which, for the most part, only the U.S. and Europe are participating. Very late in the cycle, Europe eventually drops off and the U.S. stands alone. Finally, the U.S. is the last to complete its bull market cycle and the entire globe drops into bear market. When you see this type of pattern, be warned of something that most investors fear: the end is near.

This same pattern occurred during the last super technology-inspired boom in the 1920s, when a deflationary crisis occurred in Europe and the United Kingdom was experiencing its worst deflationary cycle in its history (see Gold In A Deflationary Economy, which analyzes each cycle of inflation and deflation back to the year 1560) but the U.S. stock market continued to boom until 1929. By its 1929 peak, the U.S. market was the only market still hanging onto the old trend, even as others were melting down.

Again this type of pattern occurs now, but the global economic crisis originated in eastern Asia instead of in Europe. In 1997, beginning in Thailand, a 1930s-style global economic crisis began to spread across the globe. The Eastern Asian bull markets were over, and that would soon spread across the globe until, in 1998, only the U.S. and Europe remained in bull markets. View our Forecast '98: The Global Meltdown of 1997, What's Happening And Why on-line for more details.

In the summer of 1998, Europe peaked, with the U.S. dropping in tandem into a low last fall. The rebound rally from the October 1998 low has not seen European stocks reach new highs, though. In fact, even the average U.S. stock has not reached a new high, instead tracing out a steady downtrend since April 1998. Only high-capitalization indices like the S&P and the Dow have reached record highs, and our short-term daily Web updates show why is about to end, too, even as we called for a rally of this week's 16 trading-day cycle low.

A list of all the fundamental and technical reasons for the big picture scenario is beyond the scope of this discussion but is presented in full detail in our most recent special research report, Forecast '99: Investing During The Void. The Void, we contend, is a period of time that occurs after the initial meltdown of the global economy and before the new monetary changes and the new solutions -- the new system that we refer to quite simply as "The New" -- arrives. Many countries have already fallen into The Void, and they are not just emerging markets like Eastern Asian, Indonesian. or others. Japan, the world's second-largest economy, is reeling in a 1930s style depression and seemingly unable to emerge out of it. Russia has no economy and no rule of law to speak of, and Brazil's stock market may have rebounded but their currency has halved itself during this year's most recent crisis.

These countries are truly in The Void, which is important for investors to recognize because investment strategies must change in order to not only survive but to prosper. Risks are high -- not only because the global markets are unstable and the economy is contracting, but because investors at this stage of the cycle typically do not properly view their investment capital as, well, investment capital. Instead, they feel that they must remain invested in the stock market or they do not have an investment at all (most other investments are typically doing poorly in the latter stages of a bull market in stocks).

However, we continue to advocate -- to urge, in fact -- investors to view their investment dollars not as stock market dollars only, but as investment dollars that can be placed in other investment markets besides stocks. To illustrate, we have featured examples of past recommendations we've made that have outperformed the risky stock market, even as stocks remained strong. Now, the world is changing again, and even as the S&P and high-cap indices challenge record highs, diversification is the key to surviving what lies ahead. Otherwise, investing is no longer investing. It is just gambling.

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