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'70s stagflation survivor
17 Comments
John Hussman: The Market Is Not in Uncharted Territory
dshort.com/charts/Dow-...
Here's a monthly chart over the same timeframe with some 10MA signals:
dshort.com/charts/Dow-...
This monthly MA strategy is not suitable for long-term sideways markets (and it certainly won't be of interest to a mutual fund manager). But it has worked reasonably well since the mid 1990s. It would have saved a lot of pain in 1929-1932, and it would have moved your to fixed income in November of last year.
Consumers Buy Into Disinflation
dshort.com/inflation/i...
The chart also shows post 1982 inflation if the BLS had the same method as it employed from 1913 to 1982. See shadowstats.com for a full explanation of the alternate CPI, which is tracked at that website.
Thoughts on Market Volatility
Here's the amazing part -- fourteen of them have occurred since September 29th. The Crash of 1929 had only eight. Another thirty followed during the ten-year Great Depression. Four were clustered around the Crash of 1987. Only two happened during the nasty 2000-2002 bear.
Now, guess how many of these volatile days ended with a gain versus a loss. Find the answer here: dshort.com/
Portfolio Expectations: What a Difference a Year Makes
The 81-year time frame really resonates with those of us who study market history. And when analyzing long-term performance, it's also important to factor in the impact of inflation, as these two charts illustrate:
dshort.com/charts/SP-C...
dshort.com/charts/SP-C...
Thanks again!
The Obama Bottom
dshort.com/charts/bear...
Drawing trend lines on charts during bear markets is an entertaining pastime. But the impact of the looming global recession on today's markets may keep you busy redrawing those lines for many months to come. The real precedents could indeed date from the late 1920s.
The chart line I find the most troubling is a linear regression on a century or more of market closes. Take your pick:
dshort.com/charts/dow....
dshort.com/charts/SP50...
You can speculate about the new sheriff in town and past being behind us. But I think the past remains very relevant. Take a look at these two charts and ponder one simple concept: "regression to the mean," which frequently involves overshooting in the opposite direction.
Market Bottom: Historical Norms May Not Apply
Consider, for example, that the eight-month recession during the 2001-2002 bear market ended in November 2001, according to the NBER, with the S&P 500 at 1,084.10. The index didn't bottom out until the following October at 776.76. That's a further decline of 28%.
A more productive approach to the question of when the current bear market will end is to examine previous bottoming processes. The key word is "process". Rather than a sudden single event, the bottom is better understood as a process over a period of weeks or months. An overview of the eight completed S&P 500 bear markets since 1950 reveals this bottoming process that lasted anywhere from six weeks to eight months:
dshort.com/charts/bear...
In four of these bear markets, the first low in the process was the actual bottom. In three, it was the final low. In the triple bottom of the most recently competed bear, the trough came in the middle. The process ranged in length from six weeks to eight months. There is no clear correlation between the depth of the decline and the length of the bottoming process. Likewise, the overall length of the bear market doesn't reliably predict the amount of time spent bouncing around the bottom.
Bears Have Rallies Too
dshort.com/charts/dow-...
The color coding follows the traditional definitions: A bull market is a 20% rally preceded by a 20% decline and vice versa.
Surviving the Short-Term to Participate in the Long-Term
dshort.com/charts/dow-...
I wanted to understand the historical precedence for the amazing volatility we've recently experienced. You have to go back to the first half of the Great Depression to find volatility as dramatic as we've seen over the past few weeks.
After reading the dimwitted CNN Money article, I simply sorted the Dow percent gains since 1928 in an Excel spreadsheet. What I saw was utterly amazing. Here's a link to a table showing the 55 days since 1928:
dshort.com/tmf/dow-5-p...
Actually there were no 5% days in 1928. The first occurred a couple weeks before the Crash of 1929. There's a total of 54 days to date, all from the timeframe of '29 Crash and Great Depression except for one in 1970, two associated with the Crash of 1987, two near the bottom of the Tech Crash in 2002, and two huge days in the past few weeks.
Rather disturbing.
Surviving the Short-Term to Participate in the Long-Term
In the spirit of Black Swans, here's a sanity check on the CNN Money headline. Today's percentage gain is impressive -- the seventh best Dow return since 1928. But check out the dates of the top six:
1. 15.34% 3/15/1933 Great Depression
2. 14.87% 10/6/1931 Great Depression
3. 12.34% 10/30/1929 Two days after Black Tuesday, the Crash of 1929
4. 11.90% 6/22/1931 Great Depression
5. 11.36% 9/21/1932 Great Depression
6. 11.08% 10/13/2008 Two weeks ago
7. 10.88% 10/28/2008 <= Today
And it doesn't get any better after that. Number 8 was two days after the Crash of '87.In fact, the next 44 in order of descending gains were all during the Great Depression except for three -- two in 2002 during the Tech Crash and the first day after the Crash of '87.
Indeed, these are interesting times!
Why Today Is Different From the Inflationary 1970s
dshort.com/inflation/i...
We don't yet have wage inflation, which creates an inflationary spiral. But the level of consumer suffering is indeed approaching the '70s.
Just Your Average Bear Market
dshort.com/docs/Bear-M...
Using the 20% decline benchmark, the S&P 500 remains above bear territory. Here's a table of stats on the eight bear markets since 1950:
dshort.com/articles/ne...
One additional stat not included in the table: The average length of time it took these eight bear markets to reach a 20% decline was 10 months following the previous high. At present the S&P 500 is about 8 months beyond the high set last October.
Time will tell, probably soon, whether the current market turns bear. If it does, we may have to wait a while before we see how it compares to these other eight.
Fed vs. U.S. Consumer: Will Inflation Go Higher?
If the Bureau of Labor Statistics were using historically consistent metrics, we'd already be well above the 7.8% rate of inflation (headline CPI) posted in October 1973 at the beginning of the Arab Oil Embargo:
dshort.com/charts/two-...
Capacity Utilization Figures Starting to Resemble a Recession
dshort.com/charts/SP50...
As the chart shows, there can be some dramatic rallies during an extended downturn. Hopefully we won't see anything like the 49.2% decline during the last bear market.
Since 1950, recessionary S&P 500 market bottoms arrived, on average, about 14 months after the previous high. The March '08 low occurred 5.1 months after the October '07 high. That's mighty early for a bottom, although there is a precedent: The 1990 recession, which lasted 8 months, saw the market bottom out a mere 4 months after the preceding high.
On the other hand, two recessions -- '73-'75 and '81-'82 -- were accompanied by a 21 month peak-to-trough timeline. Here's an overview of recession stat since 1950:
dshort.com/docs/recess...
Given the complexities of today's economic conditions and the elapsed time since previous market highs, both extreme optimism and pessimism are probably premature.
Follow-up on CPI
www.shadowstats.com/al...
For the big picture of inflation going back to 1915, see this link:
dshort.com/inflation/i...
Frankly, I think the BLS was justified in some of the modifications to their inflation calculation algorithm. But the downside is that it obscures the degree to which today's economy is beginning to resemble the grim stagflation of the '70s and early '80s.
It's a Rally and It Feels So Good
I think you're right and share your perspective. Here's a comparison of a 2000-2002 bear rally with the current advance -- the S&P 500 with a VIX overlay:
dshort.com/charts/SP50...
Perhaps we saw a long-term bottom in March. However, given the current economic climate, I remain wary.