The past week has brought the stock market, actually all investing markets, to the worst place they have been, by many measures, in recorded history. This is actually encouraging. If it is this bad, how much worse can it get? And we are all still standing, so we should congratulate ourselves for that not-so-minor accomplishment.
How bad has it been? From today's Barrons, here are some quotes from Michael Santoli:
"The virtually unwitnessed level of damage in a short period almost defies hyperbole. After Thursday's drop to an 11-year low on the S&P 500, the index was farther below its all-time high than at any time since 1949. The year 2008, had it ended then, would rank as the worst since 1872 at least. The S&P hadn't been as far below its 200-day average since 1932. Nearly 40% of S&P 500 stocks were below $4 billion in market capitalization, the minimum new stocks must meet to be added to the index. More than 40% of the stocks in the Russell 3000 were trading below $10."
"Investment-grade corporate bonds have outperformed stocks since 1980. The S&P 500's indicated dividend yield rose above the 10-year Treasury yield for the first time since around the time the Giants and Colts faced off in their classic 1958 championship game."
Yesterday, I blogged the opinions of super-Bear Marc Faber who is finally calling for an end to the crash. Other long-time bears, even perma-bears like Jim Rogers, David Tice and Peter Schiff, are calling for more of the same. Technician Louise Yamada is calling for a low around 400 to 600 on the S&P500, which is another 50% drop from where we are today. All of these are forecasts are possible, but are they likely? It seems that even if market cycles are never the same, at least they rhyme. The two major historical references are the twin 1930s declines and the twin late 60s and early 70s declines. The path from here is likely to be similar to the aftermath of both periods.
And from another article, an interview with Robert Fetch, are similar sentiments:
"...the market is clearly discounting a fairly severe recession. There's a good chance that before this is done, the S&P will make a new low. When the S&P went below 804 last week, the percentage decline off the highs marked the greatest bear market in history since the Great Depression." "You have the capacity right now, as a value manager, to find good, solid low-valued stocks of good companies without having to pay a premium for them for the first time, really, since the early 1980s".
What marked both the 1932 and the 1974 market bottoms and resulting economic declines, was a government led effort to restimulate the economy which eventually led to a dynamic market environment. The two periods had different political settings. 1932 marked a three year period under President Hoover where the government did nothing while the markets and economy declined. Hoover and the Congress were following "Laissez Faire" (hands off) economic policies under the theory that market economies would heal themselves without government assistance. It proved to be a painfully incorrect theory.
It wasn't until FDR took office in early 1933 (March back in that time), that the New Deal was born and the government poured money into the economy with the goal of re-employing people to alleviate the very high 25% unemployment of the period. In hindsight, economists, led by Milton Friedman, have shown that had the initial response to the 1929 market crash and resultant asset deflation been more aggressively reflationary (aka stimulation through low interest rates and work programs), the worst of the Great Depression might have been avoided. In any case, investing in the market in early 1933 would have proved very beneficial, even given the 1937 correction, severe in its own right.
The 1968 and 1974 twin crashes were a little different, politically. 1968 was brought on by the uncertainty around civil upheaval caused primarily by the Vietnam war and two major political assinations (Martin Luther King, Jr. and Robert Kennedy) coinciding with a blowoff top of the 60s tech bubble. Thereafter were several years of economic gyrations and failed government policy as indicated by the collapse of the gold standard and the 1972 wage-price freeze to contain inflation. Then in 1973 came the OPEC oil crisis and gasoline rationing accompanied by a 400% spike in oil and gas prices. The proverbial straw came with the Nixon Watergate scandal and his subsequent impeachment.
But unlike 1932-33, the market collapse in 1973-74 did not coincide with a Presidential election. Instead, we had Gerald Ford serving essentially two years of a lame duck Presidency, during which nothing significant could be accomplished in Congress or the Administration to repair the economy. Under Jimmy Carter, there were efforts to stimulate the economy which worked to some degree. But the stimulation in the vicinity of high oil prices, caused massive inflation by 1978. Then came round two of OPEC's assault on the Western world's economies. High oil and gas prices in 1978-79 caused another significant recession and 20% market decline which was eventually resolved by Paul Volcker's attack on inflation and then the Great Bull Market of 1982-2000.
It is clear to me that we can rely on one of these two precedents to forecast the next 5-10 years in the markets. As pointed out before, even if history does not repeat, it rhymes. Here is a chart comparing the three periods in question that makes that point:
If we are at the end of 1932, just prior to the inauguration of a new Democratic President with a mandate to fix the economy and get people back to work, we can look at a market run 0f over 400% between February 1933 and February 1937. If instead, we are at May 1938, we can look at a 50% run over the next 16 months. After the market peaked in October 1939, the fear over WW2 stopped the market ascent and it went sideways until February 1945, near the end of the war.
If, as I think we are, at the market bottom of September 1974, on the heals of Nixon's impeachment in August, we can have at least a 70% run over the next two years as we did until the uncertainty over the 1976 election stopped the run up that summer. But because the market crash has coincided with the Presidential election, we may have a much more robust recovery in the market and economy than in 1974-76. Barak Obama has already promised to rebuild the national infrastructure to put people to work. This will be his New New Deal. The resulting spending will pump a lot of money into the economy, will lower unemployment and eventually improve the consumer spending outlook.
If the last scenario is correct, what will benefit? Infrastructure, materials and energy companies. The improving consumer will also benefit the developing export-driven economies in Asia and restart the Chinese economy (further increasing demand for infrastructure materials and services). Some names that look interesting, all down 60-80% from their peaks, are engineering companies: JEC, FLR and URS; Materials stocks: CX, BHP, FCX, NUE; Energy stocks: PWE, MRO, PVX, SU; and Asia stocks: FXI, IFN and TDF.
I already own most of the above, and have held them through this decline for better or worse (mostly worse as of late). But the case for infrastructure is better than ever. Now the above stocks are dirt cheap by every fundamental metric. Even if the timing of the recovery of the market is off by 6 months or a year and there is more decline to come in the immediate future, held over a 5 to 10 year time frame, the above will reward.
Good investing!
How bad has it been? From today's Barrons, here are some quotes from Michael Santoli:
"The virtually unwitnessed level of damage in a short period almost defies hyperbole. After Thursday's drop to an 11-year low on the S&P 500, the index was farther below its all-time high than at any time since 1949. The year 2008, had it ended then, would rank as the worst since 1872 at least. The S&P hadn't been as far below its 200-day average since 1932. Nearly 40% of S&P 500 stocks were below $4 billion in market capitalization, the minimum new stocks must meet to be added to the index. More than 40% of the stocks in the Russell 3000 were trading below $10."
"Investment-grade corporate bonds have outperformed stocks since 1980. The S&P 500's indicated dividend yield rose above the 10-year Treasury yield for the first time since around the time the Giants and Colts faced off in their classic 1958 championship game."
Yesterday, I blogged the opinions of super-Bear Marc Faber who is finally calling for an end to the crash. Other long-time bears, even perma-bears like Jim Rogers, David Tice and Peter Schiff, are calling for more of the same. Technician Louise Yamada is calling for a low around 400 to 600 on the S&P500, which is another 50% drop from where we are today. All of these are forecasts are possible, but are they likely? It seems that even if market cycles are never the same, at least they rhyme. The two major historical references are the twin 1930s declines and the twin late 60s and early 70s declines. The path from here is likely to be similar to the aftermath of both periods.
And from another article, an interview with Robert Fetch, are similar sentiments:
"...the market is clearly discounting a fairly severe recession. There's a good chance that before this is done, the S&P will make a new low. When the S&P went below 804 last week, the percentage decline off the highs marked the greatest bear market in history since the Great Depression." "You have the capacity right now, as a value manager, to find good, solid low-valued stocks of good companies without having to pay a premium for them for the first time, really, since the early 1980s".
What marked both the 1932 and the 1974 market bottoms and resulting economic declines, was a government led effort to restimulate the economy which eventually led to a dynamic market environment. The two periods had different political settings. 1932 marked a three year period under President Hoover where the government did nothing while the markets and economy declined. Hoover and the Congress were following "Laissez Faire" (hands off) economic policies under the theory that market economies would heal themselves without government assistance. It proved to be a painfully incorrect theory.
It wasn't until FDR took office in early 1933 (March back in that time), that the New Deal was born and the government poured money into the economy with the goal of re-employing people to alleviate the very high 25% unemployment of the period. In hindsight, economists, led by Milton Friedman, have shown that had the initial response to the 1929 market crash and resultant asset deflation been more aggressively reflationary (aka stimulation through low interest rates and work programs), the worst of the Great Depression might have been avoided. In any case, investing in the market in early 1933 would have proved very beneficial, even given the 1937 correction, severe in its own right.
The 1968 and 1974 twin crashes were a little different, politically. 1968 was brought on by the uncertainty around civil upheaval caused primarily by the Vietnam war and two major political assinations (Martin Luther King, Jr. and Robert Kennedy) coinciding with a blowoff top of the 60s tech bubble. Thereafter were several years of economic gyrations and failed government policy as indicated by the collapse of the gold standard and the 1972 wage-price freeze to contain inflation. Then in 1973 came the OPEC oil crisis and gasoline rationing accompanied by a 400% spike in oil and gas prices. The proverbial straw came with the Nixon Watergate scandal and his subsequent impeachment.
But unlike 1932-33, the market collapse in 1973-74 did not coincide with a Presidential election. Instead, we had Gerald Ford serving essentially two years of a lame duck Presidency, during which nothing significant could be accomplished in Congress or the Administration to repair the economy. Under Jimmy Carter, there were efforts to stimulate the economy which worked to some degree. But the stimulation in the vicinity of high oil prices, caused massive inflation by 1978. Then came round two of OPEC's assault on the Western world's economies. High oil and gas prices in 1978-79 caused another significant recession and 20% market decline which was eventually resolved by Paul Volcker's attack on inflation and then the Great Bull Market of 1982-2000.
It is clear to me that we can rely on one of these two precedents to forecast the next 5-10 years in the markets. As pointed out before, even if history does not repeat, it rhymes. Here is a chart comparing the three periods in question that makes that point:
If we are at the end of 1932, just prior to the inauguration of a new Democratic President with a mandate to fix the economy and get people back to work, we can look at a market run 0f over 400% between February 1933 and February 1937. If instead, we are at May 1938, we can look at a 50% run over the next 16 months. After the market peaked in October 1939, the fear over WW2 stopped the market ascent and it went sideways until February 1945, near the end of the war.
If, as I think we are, at the market bottom of September 1974, on the heals of Nixon's impeachment in August, we can have at least a 70% run over the next two years as we did until the uncertainty over the 1976 election stopped the run up that summer. But because the market crash has coincided with the Presidential election, we may have a much more robust recovery in the market and economy than in 1974-76. Barak Obama has already promised to rebuild the national infrastructure to put people to work. This will be his New New Deal. The resulting spending will pump a lot of money into the economy, will lower unemployment and eventually improve the consumer spending outlook.
If the last scenario is correct, what will benefit? Infrastructure, materials and energy companies. The improving consumer will also benefit the developing export-driven economies in Asia and restart the Chinese economy (further increasing demand for infrastructure materials and services). Some names that look interesting, all down 60-80% from their peaks, are engineering companies: JEC, FLR and URS; Materials stocks: CX, BHP, FCX, NUE; Energy stocks: PWE, MRO, PVX, SU; and Asia stocks: FXI, IFN and TDF.
I already own most of the above, and have held them through this decline for better or worse (mostly worse as of late). But the case for infrastructure is better than ever. Now the above stocks are dirt cheap by every fundamental metric. Even if the timing of the recovery of the market is off by 6 months or a year and there is more decline to come in the immediate future, held over a 5 to 10 year time frame, the above will reward.
Good investing!
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