The Power of the Cycle In Predicting Global Economic Trends

A few years ago, I was reading a sidebar in Barron’s by PIMCO director Paul McCulley. He was discussing an upcoming stock market peak for later that year… and interestingly enough, it was at the same time that sunspot cycles were predicted to peak.

This wasn’t the first time I’d heard respected analysts connect market activity to sunspot activity. Charles Nenner, a prominent cycle analyst believes there’s a plausible connection. So does Richard Mogey, founder of the Foundation for the Study of Cycles. By the way, that’s the caliber of speakers at our conferences and we were lucky to get him to present at our Irrational Economic Summit last year in Miami.

With McCulley joining the growing ranks of believers, it got me thinking… I thought that there had to be something to this theory. Do sunspot cycles affect the stock markets in any way?

I know it sounds crazy. First of all, I’m no stranger to being called crazy and second, success isn’t found inside the box…

As you know, NASA tracks and projects sunspot activity — that makes it more projectable. It’s discovered that movement on the sun’s surface ebbs and flows in cycles… just like everything else in life. As the cycle unfolds, the earth is bombarded by varying amounts of solar radiation. The high cycles can knock out satellites and communication systems. They also raise temperatures and rainfall. I explain this concept in more detail in my latest book, The Demographic Cliff.

I also recently wrote about how it’s affecting the farmland bubble, and as you know, I love to dig around and do my research. If I have a question, I dig in and find the answer.

Of course, rising and falling energy cycles certainly could have some impact on human behavior…

What was more interesting to me though was that this sunspot cycle is reputed to peak every 11 years — that’s why I first rejected it as I saw no correlations on 11-year cycles. So I went back and documented the peaks back over a hundred years only to discover that the real average is 10.3 years.

That’s when I got really interested.

You see there’s another cycle we follow closely, one first documented by Ned Davis. It actually has been one of the critical cycles in our research for decades. It’s called the Decennial Cycle and it tends to peak around the end of each decade and bottom in the second year of the next decade. And in the last cycle, there was a peak in early 2000 and a bottom in late 2002, right on cue.

The cycle then remains sideways to moderately up for stocks until the middle of the decade (i.e., late 2004 or late 2014), and then rises the most sharply again into the end of the decade.

Whether such cycles bottom earlier or later in the first few years of every decade has been related to when the four-year presidential cycle bottoms. That’s why we had major bottoms in 1962, 1970, 1982, 1990 and 2002.

These two cycles together — the 10-year Decennial Cycle and the four-year Presidential Cycle — created our best intermediate patternrns for decades. The last time these two cycles should have bottomed together was late 2010 and a major crash and recession would have been expected more broadly between 2010 and 2012. But that didn’t happen…

When the economy weakened in 2010 to near zero growth, the Fed stepped in with QE2. It did it again in mid-to-late 2012 forward with two phases of QE3. All of which, I assumed at first, threw the otherwise reliable cycles out of kilter.

Or is there another explanation?

As I said before, the average sunspot cycle is 10 years. The last top was in early 2000… right at the top of the tech stock bubble. But that sunspot cycle bottomed years later than normal… and would you believe what happened next?

The stock market crash bottomed in early 2009… at exactly the same time the sunspot cycle bottomed.

NASA predicted a later than usual sunspot cycle to peak around mid-to-late 2013. And guess what? That’s when our analysis of stock patternrns suggested that we could see a top in the markets.

We thought the Decennial Cycle failed for the first time in 50 years, but if sunspots are the cause, we just got an eccentric cycle that pointed down from late 2013 into late 2019, just as our spending wave and Geopolitical Cycles were also pointing down.

Subsequently, months of research into this sunspot cycle has shown that 88% of the major crashes, recessions, depressions and financial crises came in the down cycle, and most of the rest came close on either side. This is clearly no coincidence!

But here’s the important rub to note, this cycle peaked a little later than the scientists forecast… in February 2014.

Here’s the bottom line: this cycle, the most powerful I have discovered since the spending wave, looks like it peaked in early February of last year and now points down into late 2019 or early 2020.

The worst crashes come in the first 2.5 years after a peak just as Ned Davis’ Decennial Cycle suggested — so the greatest should be coming between mid-2015 and late 2016.

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P.S. We consistently stress that demographic trends are key to an economy. And it is key in both developed and emerging nations. Charles explores that topic in a part of the world that may surprise you. Read on

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Harry Dent

Bestselling author and founder of Dent Research, an affiliate of Charles Street Research. Dent developed a radical new approach to forecasting the economy; one that revolved around demographics and innovation cycles.