--- Twelve-Year Lows (Like The One Set
March 2) Have Marked Market Bottoms
The S&P 500 closed February
with its worst 6-month return since June of 1932. That happened
to be the market bottom of the Great Depression.
This past week, stocks broke
12-year lows. In other words, investments made in the index
12 years ago now have no gains or losses. According to JPMorgan's
Thomas Lee, that has only happened twice before. One time
it marked the exact bottom of the market to the day (December
6, 1974) while the other time the market bottom came exactly
three months later. In fact the market proceeded to surge
73% in two months and 134% in a year. A sample size of two
does not a trend make, but this shows you the potential
recovery that could be around the corner.
--- Those Who Made Correct Market Calls
In 2000 & 2007 Make New Contrarian Forecast
In 2000, investment management
predicted that large companies (such as the firms in the
S&P 500) would have a 10-year real return of -2% per
year (see figure
6). The result? The S&P 500 has produced a return
of about -7% per year since 2000. GMO also predicted real
estate and emerging markets would return approximately 9%
per year. It turns out that all three forecasts were very
accurate. GMO was negative on large companies at a time
when everyone else was loading up on them.
In June of 2007 (see figure
9), GMO was high on cash, U.S. government bonds, and
TIPs. They predicted negative returns for real estate and
all stock categories. Again, their forecast was very accurate.
So what is GMO predicting
for the next seven years? Once again, they are going against
the crowd. GMO is high on the assets currently being shunned
(stocks will average 7-11% per year) and is negative on
today's popular investments (government bonds and short-term
Treasuries). Please note that these are 7-year forecasts
and GMO accurately notes that there is often a large overshoot
on the downside when a bubble bursts. For more details,
see GMO's 7-Year
Asset Class Forecast published on January 24, 2009.