“The Spending Wave unerringly predicted the booming economy long before it happened.” - Harry S. Dent, Jr.

One simple forecasting tool predicts, with uncanny accuracy, the health of the economy and the stock markets over many decades to come: the Spending Wave.

Mr. Dent first used the Spending Wave in 1988 to predict the raging bull market of the nineties long before it became obvious. At that time, he stated that the Dow would reach 10,000 or higher and that this boom period, characterized by high domestic productivity and falling interest rates, would last until approximately 2010. By adding immigration data to my original model and making a few other adjustments, he raised his Dow forecast much higher. This fine-tuning increased the accuracy of the Spending Wave without changing its fundamental reliability.

The Spending Wave predicts the health of our economy by lagging the birth index forward 46.5 years. Why this number? That’s how old each of us is when we reach our predictable peak in spending today. By our mid-forties,the average American family has purchased the largest home we’ll own and all the furnishings to go with it, and we spend money on clothing, food and education for our teenage children. Once the children leave the nest, the fixed costs remain the same but variable costs suddenly start dropping. Though this frees capital for discretionary spending, it marks the end of the necessary family spending that drives the economy.

“The essence of the Spending Wave is simple: Predictable spending patterns drive the economy.”

The Spending Wave chart shown here illustrates the close correlation between the birth index, lagged forward 46.5 years, and the Dow adjusted for inflation. As you can see, the Spending Wave allows us to see when the stock market will grow and decline almost five decades in advance. Equities, especially large company stocks,are the place to be when increasing numbers of a generation are moving to their peak spending years.

“The Spending Wave provides a five-decade window on stock market trends.”

The baby boom Spending Wave started in late 1982 and should continue until about 2010. It is the unusually large size of this generation that is causing the stock market to perform even better than it has in past boom periods, such as 1942 to 1968, when the Bob Hope generation was moving into its peak spending years. In that boom the Dow averaged 11% annual growth rates. In this boom it is averaging 17%, which is why valuations, or P/E (Price to Earnings) ratios are higher. I expect 16% to 17% returns in the Dow and S&P in the coming decade, and substantially higher returns on strong sectors such as technology, bio tech, financial services and health care.