What secular history shows us is that stocks are unlikely to return to those 2009 lows or get anywhere near them. Our closest historical mirror is the 1940s secular bear because interest rates were kept negligible due to excessive debt. With central banks committed to keeping interest rates low in our current environment until recovery is entrenched (which will by association mean a secular bull is entrenched) we have even more reason to expect stocks to perform well, because their attractiveness strengthens relative to bonds and cash. Stocks dividend yields are at record highs versus treasury bond yields. This could mean that this time round, US equities do not need to drop to single digit p/es, because they are already at secular cheap valuations in terms of comparative yields.

Let’s draw in solar cycles and understand that a recession has always followed a solar maximum, and the solar maximum is forecast for 2013. Based on previous timings, we might expect that recession to come to pass 2014-15. Using the 1940s as our closest historical mirror, the recession could well be mild, as ultra low rates and central bank support are likely to persist through it.

Usually, stocks turn down roughly 6 months before a recession begins, as a leading indicator. This is how I see the price action in equities unfolding:

The topping out in the stocks cyclical bull (since 2009) should be a process - a trading range at the top, as seen in 2007 and 2000 on the chart. A high and then a retest of the high, but with negative divergences telling at the second attempt. I suggest stocks will top out as commodities really take off, with a big move in commodities bringing about an economic slowdown / recession. Stocks should therefore act as a leading indicator of that slowdown. I suggest stocks can reach 1600 on the Sp500 before topping (1600 is not my call for a top but a reachable level), and then retreat in a mild cyclical bear to go with the mild recession. As per the pentagon charts at the top of the article, stocks may pullback to 1300 or so in that cyclical bear, before advancing in earnest in a secular bull as of sometime in 2014.

Let me finish by contrasting my forecast with the very bearish projection that some others are promoting, because it clearly has huge implications for positioning. This is a chart with text from the Financial Tap, but I'm not singling them out - there are several well known sites publishing something similar.

It looks technically compelling, and the supporting arguments run something like this: despite all the easing and stimulus the world economy can't get any sustainable growth, and when the penny drops that central banks are impotent, the bottom will fall out of the market. Not only that but excessive debt has not been resolved, and a sovereign is going to default sooner rather than later. Excuse me paraphrasing, but you get the idea.

My argument is this. There is no historical precedent for that major third collapse from previous secular bears. Any 'third' low is much higher. The shaping out of the 1940s and 1970s bears from this point is bullish, not bearish. Furthermore the current environment is one of ultra easy monetary policy, together with central bank commitment to stimulate and support like never previously, which really provides great support for yielding asset prices from underneath (cash and bonds are paying guaranteed negative returns, which improves the picture for equities yet further). What is more, equities are historically at cheapness extremes versus bonds, and also cheap in relation to commodities. Some European countries are at absolute secular valuation lows. The Eurozone is committed to staying together and to not allowing a default in any of its members. Their step by step measures, and other repairs in the global economy and the markets since 2008/9, are genuine reasons for equities to be much higher. Sustainable growth will be the last piece: once we are growing sustainably (technological evolution continues its parabolic ascent), the secular bull will be mature and some way higher.

What if this time is different? It is absolutely concerning that exponential trends in population, consumption and debt (brought forward consumption) are unsustainable in a world of finite resources, and our debt-based money system and policies of permanent inflation threaten to eventually accelerate to either system collapse or hyperinflation if no changes are made. However, none of those issues are at crunch point YET - we are just further up the curve. On current trends, humanity faces a true crunching of these issues from around 2030 to 2060. Between now and then things may change and exponential technological evolution has the potential to deliver solutions to some of these issues. Should no solutions be found, then we still have 'room' for a secular bull market in stocks before the crunch. An acceleration of the debt parabolic has defined these last few years, but once sustainable growth re-emerges, we will see an end to these large debt accelerations (not a resolution, just a slowing). I predict debt to be maintained at ratcheted-higher levels, and inflation to be permanently ramped higher, with the latter assisting in containing the former.