History lessons

After nearly 33 years in this business, I think I have seen my share of investment speculation mentality. Today I’d like to take a brief look at some past irrationally exuberant markets that ended up combusting. We’ll look at the recovery time after the flame went out. Then we can ask what might happen to the US markets following the irrational exuberance that lead us into the peak at the end of 2021.

Nikkei

In the late 1980’s, it was the Japanese market fad. Mutual funds were popular back then, and the Japanese funds were skyrocketing as Japanese real estate and stocks soared. I was only two years on the job when I witnessed the implosion in 1992 – and the beginning of called the “lost decade” for that market. Truthfully, its not recovered to its 1991 highs. So its been a lost 31 years (1991 to present). Let us hope that the NASDAQ and/ or SPX does not end up like the Nikkei.

SPX

Here’s a chart of the S&P 500 noting the time it took for recovery after major peaks/ major crashes.

From left to right, peak to recover times:

  • 1929 to break-even took 16 years (1955)
  • 1973 to break-even took 10 years (1983)
  • 1999 to recovery took 9 years (2008)
  • 2008, having just recovered the 1999 levels, took 5 years to break-even (2013)

Note that the time to recovery seems to be shrinking. That’s encouraging

 

Here and now

The selloff to date, as seen on the chart above, has been miniscule compared to past bears. If we revisit my chart posted in the last blog, the “Big red arrow” trendline I posted then suggests that a trend regression would bring us back to 2500-ish. Here’s a variation of the chart in the last blog. Its a trend channel, where you try to contain as many of the peaks and troughs as possible on average, while allowing for some outliers that exceed or fail to reach the far ends of each trendline.

The chart goes back to the Great Recession crash bottom. Note how the upper channel was breached 3 times: in 1938 (briefly),  in 1999, and…2021!!!

Each of those parabolic moves that drove the market through its upper channel. This led us into a bigger than average crash/correction. The 1999 peak saw a bear market selloff, and then a strong recovery. This, followed by an even lower low….Check the chart below out. Note the 1938 and 1999 upper channel breakouts to give yourself a scare. Who needs caffeine when you have market fears to keep you awake?

Thoughts

If the current bear turns back down again, as I have noted may happen (not a prediction, but a distinct probability IF the SPX fails at 4300) – history suggests we’d perhaps see a move to as low as 2500. From there, it may take a year, or years, to recover – given the recovery pattern after long crashes noted near the top of this blog.

So…no predictions here. For now, there is some upside potential into the year-end as noted in past blogs. But….

History offers clues to suggest that the market could get ugly next year. I’m certainly preparing for anything by having a plan. And don’t forget, there are areas you can still make money: I expect that long bonds and materials will move after the FED/ BOC finally admit that they need to settle for a less ideal inflation target … and flatten rates to fight recession.

We don’t KNOW what will happen. So… Don’t predict. Do prepare.

 

 

2 Comments

  • Hi Keith,
    History suggests that we might move towards 2500 on the S&P 500. What does history suggest for the TSX?

    Reply
    • Wendy–the tSX has a goofy history–where in the late 1990’s it was one stock (Nortel) holding 35% weighting. Now, there are no individual stocks so overweighted–thanks to the S%P corp taking over the model. Thus, history is so distorted with the TSX index and its model changes that its meaningless.
      Whatever the case: TSX is highest weighted in: financials, energy, materials. Banks and insurance like high rates, energy and materials do well in a higher inflation environment (say 4% per my longer termed views). So I have to think that – while there is influence by the US indices, it may turn out that the TSX has a differing pattern – as it has for many years (underperforming when oil declined and tech pushed SPX up)

      Reply

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