Today's Market Observation 07.30.2009 Mon Tue Wed Thu Fri Park Archive
Market Déjà Vu
BY DANIELLE PARK | july 30, 2009
Much as it may upset the individualists among us, human behaviour has been remarkably consistent through time. At my firm we are but humble students of history and so we are open to its lessons. As we often tell our kids, we don’t get to dictate the world; it is just our job to study and manage along.
What we find interesting is how similar market behaviour can appear over seemingly unique and unrelated events in time. The following historical chart of the S&P 500 since 1870 makes the point. It shows a series of 4 secular bear periods this century where stocks have dropped 65-70% over extended 14-20 year periods. We can see that so far in our secular bear which began in 2000, markets have dropped for a relatively short 9 years to date, although the extent of the decline from the 2000 peak has already been within the historic “norm”.
Source: The Chart Store via The Big Picture Blog
We accept that we are likely to be within a secular bear period for several more years to come. Although the magnitude of market declines has been significant since 2000 starting from the highest ever levels in history, the market cap of US stocks is still not quite back to the long-term mean. To revert to the long-term mean, prices would have to move below the mean over time.
Relative valuations of equities at this point are still on the high end when compared to the finale of other secular bears. To date we are far from the single digit PE’s and 9% dividend yields that have marked prior secular bottoms. And it has always taken historically oversold conditions in equity markets to jumpstart the secular bull periods throughout market (human) history. Things could be “different this time” we know, but at this point we are happy enough to just watch for the next cyclical bull within a probable ongoing secular bear period. And on that front, we suspect it is likely that we are getting close.
Since the March 9 market lows, we have seen broad-based pessimism give way to a synchronous relief rally in risk assets around the world. We would like to believe that March 9 was “the” low of this bear market, but having studied more than 100 years of market cycles, we must acknowledge first, that there is no way to know a bottom in advance, and second, that bottoms have always been a process, not a day. Lasting bottoms each cycle are typically tested more than twice.
A most recent study can be made in comparing the below chart of the S&P 500 price action during this bear market 2007 to date and the preceding cyclical bear of 2000-2002.
Source: Venable Park Investment Counsel Inc.
We note that the price behaviour to the November 2008 low and the March 2009 lows line up with the July and October 2002 lows in the chart above. It will be interesting to see how much of recent gains this market may now need to retrace in the weeks ahead in order to confirm this cycle’s final low. If the correlation to the 2000-2003 contraction were to continue, the S&P may need to retest the 800 level by August to October this fall.
We are aware of the narrative fallacy of trying to forecast the future. Ignorance tends to breed confidence; and we are far from ignorant in this area. However, postulating scenarios for what may happen next is a requirement of this fascinating work.
For 10 key rules to help manage capital safely through this and every market cycle, see
my recent blog article: Managing through the market buzz.
Danielle Park
Copyright © 2009 All rights reserved.
contact information
Danielle Park
Portfolio Manager, Venable Park Investment Counsel Inc.
Barrie, Ontario Website |
Observation Archive
