Volatility may haunt global stock markets for another few years, but inevitably, equities are primed for a massive bull run, if historical performance is used as a guide, says Matthew Kidman, author of Bulls, Bears & A Croupier.
Both the U.S. and Australian stock markets, which Kidman says are currently in bear market territory having lost about 20 percent in the past five years, have the most potential for gains. He notes that the Dow Jones Industrial index gained around 10,000 points from year 1982 to 2000, and believes the feat could be repeated, with the blue-chip index reaching 100,000 in 20 years.
"If you look back at history, we go through bear and bull phases. And when you go into a bull phase, you can put on a thousand percent over ten to fifteen years. So I'm being quite conservative on what could happen," Kidman said.
It's a similar case for the Australian market, Kidman pointed out. "If you look back at 1974 when the Australian market hit a low, the All Ordinaries Index was at 220. By the time it hit its peak in 1987, 13 years later, it was at 2,400. In 13 years, it did slightly more than a thousand percent," he said.
But brace for further selling before the rally kicks in. Kidman predicts the Dow could decline 35 percent in the next 18 to 24 months, while Australia’s benchmark All Ordinaries Index could decline 20 percent in 2012.
"The bottom might be some time next year, early 2013. I think then it'll take three, four, five years to get back to the old highs,” he added.
But Kidman cautioned that the current bear market may “last longer” and “be more brutal than previous ones,” because they aren’t trading on fundamentals due to the many external risk factors, including the current debt tangle in Europe.
"History is a lot more prescriptive than the actual fundamentals at the moment. Fundamentals will come back by the way, but they're not going to be there for the next little bit," Kidman said.
But these declines will create "once-in-a generation" buying opportunities, according to Kidman, similar to when the market stock markets hit a low in March 2009.
"Over the next twelve to eighteen months you've got to be really ready to go back into the market. I'm not saying you are going to win over the next twelve to eighteen months. But get ready to look at it, see what's going to happen and prepare yourself to get ready for the next bull market," Kidman said.
"You've got to remember in bear markets, and why they're so great as a launching pad for a bull market is things get ridiculously cheap."