A Declining Real Estate Market Can Boost Stock Averages

During the last real estate downturn in the early 1990s, I first observed what historically has been a repeatable pattern. As real estate was receding, stock markets were gathering momentum. The same sector rotation that was underway in 1993 I had observed before in the early 1980s. Thousands of upside down homeowners and speculators were walking away from properties and giving them back to the banks because they owed more than the current values. And because money goes where it is treated best, billions of dollars went flowing into the stock and bond markets lifting prices slowly and steadily. This was evidence that the 9 year real estate cycle was repeating, providing tremendous opportunities for any forward looking investor.

The 9 Year Rhythm

The more research I did, the more excited I became. Real estate and stock markets tend to be on opposite sides of a 9 year cycle. Historically, as real estate prices moved up, the stock market suffered. Wall Street prospered and stock averages rose during real estate downturns. This has been the pattern for a very long time. If we can pay little or no attention to all the dire stock market warnings and buy quality at a discount, the highest probability bets should work in our favor again.

There's a lot of persuasive data that can be helpful. In 1931, Economist Edward Dewey was hired by the government to study the cause and underlying dynamics of the Great Depression. What he and his research team discovered was that nearly everything in our world, financial markets included, move through cycles that repeat over time. This "rhythmic phenomena" is observed in economics and other sciences, and most cycles occur within established time frames, making them effective tools for prediction.

They found a correlation between the 4 year Presidential election cycle, the business cycle, and stock prices. The research takes us all the way back to the 19th Century. Cycle highs for the stock markets occurred in 1856, 1865, 1874, 1883, 1892, 1901, 1910, 1919, 1928, 1937, 1946, 1955, 1964, 1973, 1982, etc. Simply add 9 years to each successive date, and you can see the pattern. 1991 and 2000 were certainly on schedule as 9 year market peaks! If the cycle repeats as it has over the last 150 years, the next stock market cycle high should occur in 2009, providing substantial profit potential for the next couple of years.

Putting on our swami hat and looking into the crystal ball that cycle theory provides, it's easy to be bullish on the stock market and bearish on real estate...until the great cycle begins to shift again in 2010 – 2011.

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Disclaimer
The opinions expressed are those of Gabriel Wisdom and Michael Moore and do not necessarily reflect the opinions of American Money Management, LLC (AMM), an SEC registered investment advisor. Clients of AMM, Mr. Wisdom, Mr. Moore and employees of AMM may buy or sell investments mentioned without prior notice. This newsletter should not be considered investment advice. The opinions expressed do not constitute a recommendation to buy or sell securities. Investing involves risks, and you should consult your own investment advisor, attorney, or accountant before investing in anything.