The Suckers Rally, Japan Style

Most references to classic suckers rallies point to the 47% rally on the S&P 500 from October 1929 to April 1930. This is a classic example because the rally drew most investors back into the market and a strong bull-mentality took hold. Everyone thought the good-times were back.

However, once this rally came to a close, the S&P 500 continued its downward spiral ultimately falling about 89% from it’s 1929 peak. There were a total of 6 suckers rallies within this secular bear market.

The 1929 crash isn’t the best comparison to today’s market (so far). After the crash, fiscal and monetary policies were not expansionary and caused the economy to shrink more than necessary. Also, protectionism was rampant and global trade ground to a halt. Furthermore, unemployment insurance, deposit insurance and bank support did not exist, leading to countless corporate and personal bankruptcies.

The other secular bear that isn’t mentioned as often is that which started in Japan in 1990. This might be a more useful comparison for US markets today. Both are the result of property and equity bubbles. Both were followed by half-hearted fiscal policy and bank reform - policies that beat those of the Great Depression, but arguably aren’t strong enough to do more than cushion the fall. There are some clear differences, but so far, the US appears to be adopting Japanese tactics by supporting zombie banks and pretending the system is solvent. This is perhaps the most critical similarity between Japan’s lost decade and the United States today.

What did Japan’s Lost Decade Look Like?

From its peak, the Japan TOPIX Total Returns Index is down about 62%. The first major phase of this bear market occurred between 1990 and 2003 (highlighted in first graph, and zoomed-in on second graph).

Plan B Economics calculated that between 1990 and 2003, the TOPIX experienced 4 suckers rallies, each getting stronger as time progressed. From peak-to-trough, the TOPIX ultimately fell 69%.

Bottom Line: The Japanese economy experienced a persistent slowdown, but never really reached depressionary magnitudes. Despite this, the Japanese stock market experienced a persistent secular bear market that continues today. Similarly, the US doesn’t need to be in a depression for the bear market to continue for several more years.

click to enlarge

Comments

[DONE_SONZ:]

Japan didnt do much to help their banks though.They tried to hide the problems away.We are trying to buy the problems away.Will it work?We will see.

May 18 06:55 AM

[jstratt:]

The problem I have with Japan comparisons is that I was a new investor during that period. Japan's market was something bizarre like 40000 Nikkei and PE ratios were at least 5 times higher than the US markets ( 20 vs 100). At that time I wondered how can you have two markets with that much difference in valuation.

The difference today is that US PEs have dropped for most of the last decade from very excessive levels. for my own investing I think the SP500 fair valuation should approximate 800. I base that on $40 continuing S&P earnings times a 20 PE.

May 18 09:34 AM

[Leftfield:]

Japan's zombies were doing poorly during global expansion. Our zombies are sucking our blood during a global meltdown. As to the 30's "beggar thy neighbor" trade wars, we have fiat currency debasement.I don't believe any of this will work but the headlines Wall St. wants the lapdog media to shill are looking okay by their standards. Which aren't too honest. Which makes me skeptical of solutions that involve continuing to march us to bankruptcy to aid the biggest perpetrators of our debacle.

May 18 11:34 AM

[logicalman:]

could it be that seeking alpha should be renamed to perhaps the permabear site..the great majority of commentators seem to be very pessimistic,and can't seem to see anything but doom and gloom...they have so far missed a great opportunity, and get more and more upset when anything positive is said..markets will often dissapoint those who have a mindset.. the permabears seem to believe that when there is a lot more potentially bad news than good down the pike, the direction of the markets can only be down,down,down....well it doesn't work that way as many of us well know...one other point i would like to make is: try to remember that the markets in general are still down approx. 40% from their highs and many sectors are down a lot more...so perhaps we have already seen the bottom a while back...of course there are no guarantees..and that is what makes the whole thing interesting...and by the way where is Cetin??? was he just too optomistic for you???

May 18 01:45 PM

[p church:]

Regarding valuation, if the norm for the SPX is a PE of 20, we are probably right about there. 700 to 1000 then, might be a range on a short term basis. 900 would be getting a little optimistic but that doesn't matter. What matters is buyers keep buying until sell signals kick in. gravitating toward the top of a normal range should be cause for some selling, and sell signals the conviction.

As corporate earnings more than likely decline over the next few years, the range will probably drop.

May 18 02:23 PM

[Plan B Econ...:]

You know, I often find myself torn between optimism and pessimism. I'm not sure if that's a reflection of my nature or a reflection of the times.

Personally, I'd rather be pessimistic and wrong than optimistic and wrong. Prepare for the worst and hope for the best.

On May 18 01:45 PM logicalman wrote:

> could it be that seeking alpha should be renamed to perhaps the permabear
> site..the great majority of commentators seem to be very pessimistic,and
> can't seem to see anything but doom and gloom...they have so far
> missed a great opportunity, and get more and more upset when anything
> positive is said..markets will often dissapoint those who have a
> mindset.. the permabears seem to believe that when there is a lot
> more potentially bad news than good down the pike, the direction
> of the markets can only be down,down,down....well it doesn't work
> that way as many of us well know...one other point i would like to
> make is: try to remember that the markets in general are still down
> approx. 40% from their highs and many sectors are down a lot more...so
> perhaps we have already seen the bottom a while back...of course
> there are no guarantees..and that is what makes the whole thing interesting...and
> by the way where is Cetin??? was he just too optomistic for you???

May 18 02:39 PM

[Glen L.:]

I would be completely mystified if Seeking Alpha contributers were NOT, in the main, pessimistic about the equity markets and the broader economy. Anyone who has even a basic understanding of economics knows that what our government is doing spells long-term disaster. Until that situation changes, I see no reason for optimism.

And if there is reason for optimism, the commenters are free to make their case here, so what more can they ask? If you want to hear from Pollyanna, with very little dissent, turn on your boob tube and indulge to your heart's delight. If you want reality, and good advice on how to avert your own financial disaster, keep reading SA.

May 18 03:18 PM

[AndrewBaker:]

Firstly: sorry, Glen L. Hit the wrong button. I fully agree with you. (2 detractors, please vote thumbs up to re-balance!)

The Japan comparison is valid. Nothing is happening to remotely suggest that things are getting better. Japan's stock market went stupidly ballistic and lemmings carried on buying and looking up until they went off the cliff. And to today, they are still going off the same cliff. The Nikkei was at 40,000, and where is it now?

Now, we've had bankers rewarding themselves for concocting esoteric products which inevitably failed yet provided massive bonuses to not only those who dreamt them up, but the idiots at the top who, whilst being able to string together words, are unable to string together numbers.

Add to this politicians with a similar complaint plus a reluctance to tell the truth, and we are headed for the same situation: years of stagnation, stagflation, deflation ... and such that we would pray for inflation as a cure!

Why is this not recognised by so many? Because today's younger society thinks "Lost" and "Prison Break" are documentaries! They learned nothing at school, even less afterwards, and believe the rubbish the media surround them with.

S&P 500 at 500 or less is coming. Don't get caught.

May 18 03:55 PM

[dragonpaw:]

Whats'up on the tally system on this web site? Is "big brother" controlling us here? Pleeese give me many big thumbs down on this one, so I can continue to rest -assured that the paranoia remains solely imdedded in my heretofore unrecognized defective Dell!

May 18 09:18 PM

[dragonpaw:]

You've also deleted my last response! My case rests!

May 18 09:21 PM

[Fighting Yoda:]

I think comparisons with Japan are quite apt - they had a credit and property bubble we had the same. Unlike what some people say (or mistakenly believe) - Japan spent a huge amount of money on zombie banks and stimulus packages - no bank failed and they paved the entire country side with a new stimulus program every year. Japan had a lot going for it - trade surplus, high savings rate (consumer not strapped), world economy in boom- China, East Europe and the rest. But the net result was a lost decade and a lot more.

US likely will fare much worse - worldwide recession, indebted consumer, trade deficits, and budget deficits, and of course zombie banks. All these green shoots are imaginations of the very same failed economists who created this problem – “borrow and consume”. The rallies and green shoots will be still born, Obama is on a mission to outdo Bush in running deficits and ruining what is left of our economy.

May 18 09:26 PM

[Missing_Link:]

logicalman, I think you need to understand the definition of a "permabear."

A "permabear" is someone who sees bad news even when all the news is good.

When we have a boatload of bad news and honestly admit it, we're not being "permabears." We're being realistic.

Any honest appraisal of unemployment, GDP numbers, the bank situation, the housing crisis, the credit crisis, the foreclosure crisis, individual and state and corporate and federal debt, GM, Chrysler, Bear Stearns, Lehman, AIG, paint a picture that clearly indicates the current rally is a speculative bubble that's out of sync with the underlying economy.

Please read the following and see if you can still call us "permabears:"

www.moneyandmarkets.co...
www.moneyandmarkets.co...
arabianmoney.net/2009/.../
www.planbeconomics.com.../
www.marketwatch.com/st...
www.ritholtz.com/blog/.../
thetechnicaltakedotcom...
www.marketwatch.com/st...
www.bloomberg.com/apps...


On May 18 01:45 PM logicalman wrote:

> could it be that seeking alpha should be renamed to perhaps the permabear
> site..the great majority of commentators seem to be very pessimistic,and
> can't seem to see anything but doom and gloom...they have so far
> missed a great opportunity, and get more and more upset when anything
> positive is said..markets will often dissapoint those who have a
> mindset.. the permabears seem to believe that when there is a lot
> more potentially bad news than good down the pike, the direction
> of the markets can only be down,down,down....well it doesn't work
> that way as many of us well know...one other point i would like to
> make is: try to remember that the markets in general are still down
> approx. 40% from their highs and many sectors are down a lot more...so
> perhaps we have already seen the bottom a while back...of course
> there are no guarantees..and that is what makes the whole thing interesting...and
> by the way where is Cetin??? was he just too optomistic for you???

May 18 10:53 PM

[spald_fr:]

Missing Link said (regarding definition of 'permabear'):<I> " . . . paint a picture that clearly indicates the current rally is a speculative bubble that's out of sync with the underlying economy."</I>

Very well stated.

May 20 08:28 AM

[Mad Hedge F...:]

We are on dangerous ground. You know things are bad when traders celebrate a Q1 GDP of minus 4%, better than the 4.4% that had been forecast, but still the worst in history. The main causes were a 26% decline in exports and a strong yen, which diluted foreign profits. Apparently, people don’t rush out and buy a new Lexus when they lose their jobs. Many economists are hoping for a recovery when the government’s stimulus package hits seriously pared back inventories. But global asset allocators are facing a larger quandary. What is Japan’s role in the “new” world? It is not an emerging market, nor is it Europe or the US. It is on the doorstep of the world’s worst demographic problem, and its labor is not exactly cheap. But chastened by its own financial crisis that started 20 years ago, it has some of the few global banks left standing, as well as some world beating companies and a great customer in China. As American power declines, will it fall into the Chinese orbit? Maybe country allocations don’t matter anymore. Until either the Japanese or I figure this out, I’d rather stand aside. This is coming from someone who lived there ten years.

May 20 01:47 PM

[Nadeem Walayat:]

<p>The only suckers are those that shorted the rally, I wrote in Mid March to ignore corporate earnings - in the article</p>
<p><A href="www.marketoracle.co.uk...">Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470</A></p>
<p>Quote - </p>
<p>Yes I am aware of the on-going corporate earnings contraction forecasts that SUGGEST stocks should be going MUCH lower, though some of the estimates of where the market should be heading to are pretty ridiculous, were talking ridiculous price levels of as low as DJIA 400! However the stocks bull market was also elevated to Dow 14,000 on the basis of corporate EARNINGS forecasts that suggested that Stocks should go MUCH HIGHER. So what does that tell you ? <STRONG>It tells you that what you tend to read is always suggestive of the JUNCTURE being FAR AWAY, NOT imminent</STRONG>. <SPAN class="style1">IT IS ONLY LONG AFTER THE FACT, AFTER MARKET'S HAVE ALREADY MOVED THAT THE JUNCTURE IS RECOGNISED AND ANALYSIS PRESENTED AS TO WHAT WENT WRONG WITH THE SCENERIO THAT CALLED FOR MUCH LOWER PRICES. </SPAN></p>
<p>Similarly wide spread consensus today exists for SHARPLY LOWER CORPORATE EARNINGS going into 2010 THAT MUST MEAN MUCH LOWER STOCK PRICES. However this earnings analysis that is so abundant today, should have been presented OVER A YEAR AGO ! in October 2007 I.e. at or near the market peak! So that ordinary investors could actually ACT on the information. NOT NOW AT THE MARKET BOTTOM ! We are again seeing REASONS as to WHY INVESTORS should avoid investing INTO the Stealth Bull market!, precisely as we all witnessed what was effectively Bullish propaganda during the final stages of the Stocks Bull Market, so we are NOW witnessing what is effectively BEARISH propaganda in the final stages of the Bear Market. Now, don't get me wrong, I am not saying that the analysis is not genuine, what I am saying is that IT IS IRRELEVANT! As it is always much easier to build a scenario in favour of a trend that has been in force for sometime that has generated much data and analysis in support of why it exists and therefore it should continue for much longer, then to <SPAN class="style1"><... <STRONG>Out side of the Box"</STRONG><... to disregard bearish data that has been magnified by the growing consensus that really should have been known more than a year earlier in favour of the technical picture that as the analysis of <A href="www.marketoracle.co.uk...">October 2008</A> stated, that <SPAN class="style17"><... we are NOT heading for a Great Depression</SPAN> (as I will further elaborate upon in the Q&amp;A below) and<SPAN class="style17"> b. The stocks bear market HAS fulfilled its bear market objectives in terms of price and time</SPAN>, more than anyone could have been imagined a year ago!</p>
<p>But now, even after the stock price wipeout to below Dow 6,600. The analytical weight bearing down of overwhelming information is that in support of a continuing meltdown for even as long as several more years towards Dow targets such as 4,000 or even as low as 400 by what can only be termed as perma-bear psychology. Remember Dow 14,000, NO ONE PAID ATTENTION to the perma-bears at that time. As the market was firmly in grip of the perma-bull psychology which was eyeing Goldilocks levels of 18,000. There were even calls that China's SSE at 6,000 should go much higher, despite being on a P/E of about 60. The uber bullish media played on the fact that the NASDAQ peaked on a P/E north of 100, so much for the earnings factor! In fact I pointed out in November 2007 that investors should get out of china AT SSE 6,000 and to forget SSE 9,000, its going straight down towards an initial target of 4,000. Instead today earnings is brought to the fore to support a further collapse of stock prices to what is commonly referred to as reversion to below the mean, <SPAN class="style1">AS AN EXCUSE TO FALL FOR THE TRAP OF PERPETUATING A DISTANT JUNCTURE BOTH IN TERMS OF PRICE AND TIME</SPAN>. Therefore repeating the same mistakes that occur at ALL market Junctures ! Which is DATA is PUT AHEAD of PRICE ! To which my answer is this - What are you trading ? Are you trading the Corporate Earnings Data or the actual Stock Index ? </p>
<p>The only thing that actually matters is the PRICE ! NOTHING ELSE! and I mean NOTHING ! Not earnings, Not fundamentals. Listen to the PRICE or you WILL miss the Stealth Bull Market! </p>
<p>

Oct 04 10:07 AM