All in all, I just can’t justify buying into the US market these days. US stocks are not going to be the place to be for at least 5 to 10 more years. We may see new nominal highs, but remember that the inflation-adjusted stock market indexes have not even reached their 1999 peaks. My assessment is that we can only expect more of the same sideways market moving forward.

Some thoughts and references to consider:

Peter Schiff on the current bull market:

Yes, they call him Dr. Doom, but he makes some great points. Consider this excerpt from his weekly column last week:

“…On a somewhat related note, the current Wall Street bull market hype ignores the fact that all the major stock market averages are underperforming the price of gold. For example, year to date, while the Dow is up about 1.5%, the price of gold is up about 8%. Going back to January of 2000, while the Dow is only up about 15%, the price of gold price is up 150%, literally ten times as much. Even if you compare the Dow to gold starting from the Dow’s October, 2002 low of about 7,200, the Dow is up about 75% verses 125% for gold. Call me crazy but how can we be in a bull market if investors are making more money owning gold than owing stocks?” (bold: mine)

Mr. Practical at Minyanville.com

“Years of debt accumulation are not cured by a 5% correction in stocks as Wall-Street wants you to believe. A major debt correction, one that the market has been trying to accomplish for years but is rejected time and time again by Fed policy, is necessary to correct the huge imbalances that exist. To deny the necessity of this eventuality is human.

Total U.S. debt is now 3.6 times GDP and continues to grow. But new debt is having less and less effect in driving economic growth: more income is going to service that debt and less to creating production, the stuff that generates income. The second highest U.S. debt has ever been was 2.9 times in 1929….

…It now takes $7 of new debt to make $1 of GDP where it only took $1 in 1980 and $3 in 2000.

And the consumer, which is most of the economy, is in trouble too. Today household debt is now 130% of income. That is up from 100% just in 2001, 70% in 1986, and 40% in 1953….

… The US’ problems are not solved by a 5% correction in stocks and the coming debt correction won’t take a week and then go away. We do not know how it manifests nor do we know the timing of it. But you should know the nature of the beast and the only way to fight it: reduce risk before everyone else does.” (bold: mine)

Historical Dow to Gold Ratio (1900-2005)

source: www.sharelynx.com

I just can’t imagine anyone looking at this chart without at least wondering what is in store for stocks versus gold. This chart goes until 2005, so the current ratio is slightly lower at 19.

The previous two bottoms went to 2 in the 1930s and to 1 in 1980. Let’s be conservative and guess that we see the Dow-gold ratio drop to 5. This means either gold rising to $2500 or the Dow falling to $3250, or some combination thereof. My guess is that the Fed won’t let the Dow drop that far (they’ll just keep cutting rates), so I’m expecting the move from gold rather than the stock market. But you never know.

It’s not a certainty that this historical relationship is set in stone, but it sure makes you wonder.

Conclusion:

There are many reasons to think that US stocks will underperform in the next 5-10 years. There are a few reasons to think there might be a much bigger correction coming. All in all, I think it’s worth staying out of the game for now.