Investor’s Digest of Canada columnist David Chapman says the current bull market which began in 2009 should be over by the first quarter of 2018. Both stocks and bonds are going to fall. Gold will be a safe haven. Then, lights out.
Every time we pick up some article on the stock market of late, all we read is that it is on the verge of a devastating wipe-out, or that the next collapse is just around the corner. One of the best headlines we saw recently was from a famed US market guru, Harry Dent, who argued that: “2017 Is Going to Be Worse than the Great Depression!” It is enough to make you run home, pour a long hot bath, slit your wrists, and climb into the tub.
OK, maybe that is extreme. Naturally, there are many reasons writers give to back up their case. Those range from the election of Donald Trump to Brexit, rising interest rates in the US, and of course, the best one—the current bull market is now into its ninth year from the major low of March 2009 without a correction exceeding 20 per cent and is in the mother of all bubbles.
All of that is true. But none of that makes for a final top just because the stock market has been rising for more than eight years.
One market often compared to today is the ‘Roaring Twenties’ market that got underway in August 1921 and topped in September 1929. That 1920s bull market lasted 97 months. Today’s market already surpassed 97 months in April 2017. We are now beyond 100 months in.
The ‘Roaring Twenties’ market wasn’t even the longest. The 1990s bull market got underway in October 1990 and lasted until January 2000, or 112 months. Who knows? Maybe we have another year to go on this one too. For the record, the one significant correction in the 1990s only lasted a month and a half, but it did shave 19.3 per cent off the Dow Jones Industrials Average (DJIA).
It is not unusual for bull markets to end in a blow off, that is, a sharp stock price hike followed by a price drop. These are the points in time when the market just keeps going up and nothing makes any sense. Stock market blow offs always occur at the end of the economic cycle and usually come after a long period of time when the market has been moving inexorably higher.
Historic stock market blow offs
The best historic examples are: the above-mentioned ‘Roaring Twenties’ of 1921-29 that really got underway in late 1926, culminating in the September 1929 blow off; the gold market of the 1970s (1971-80) that ended in a blow off playing out from April 1979 to January 1980; the Tokyo Nikkei of the 1980s (1982-90) that ended in a blow off in January 1990; the 1990s High Tech/Internet market (1990–2000) and the subsequent blow off known as the dot-com bubble that started in October 1999 and ended for the DJIA in January 2000, and for the NASDAQ and the S&P 500 in March 2000.
The bull market of the ‘Roaring Twenties’ was one of the greatest bull markets in stock market history. Between August 1921 and September 1929, the DJIA gained 497 per cent. There was only one correction of significance during that period. In 1923, the DJIA corrected back 18.6 per cent and then chopped around into May 1924.
But the final liftoff was most impressive. From June 1928 to the top in September 1929, the DJIA gained 80 per cent. Like all blow offs and all massive bull markets, it ended in tears.
Over the next three years, until July 1932, the DJIA collapsed, retreating 89 per cent; the US and the world were gripped in the Great Depression. It wasn’t until 1954 that the DJIA finally passed the September 1929 high.
The Tokyo Nikkei (TKN) index, made up of Tokyo Stock Exchange companies, was an equally spectacular bull market in the 1980s. The TKN bull started in October 1982 and gained 470 per cent over the next eight years. The October 1987 stock market crash saw the TKN shed 21 per cent. That was the only correction of significance during the entire period. From the low in November 1987 to the final top in January 1990, the TKN soared 85 per cent.
What goes up . . .
Then it fell. Twenty-seven years later, the TKN has not regained the highs of January 1990. In fact, it is still down 48 per cent. At its lowest in October 2008, the TKN was down 82 per cent. Since that spectacular bull market, Japan has been going through a ‘long recession’, 27 years of either sluggish growth or recessionary conditions.
For all the heartbreaking gains and staggering losses we underline here, the gold bull market of the 1970s was the most spectacular, at least on a percentage basis.
Richard Nixon took the world off the gold standard in August 1971, leaving the precious metal to trade freely. Gold then rose from its fixed price of US$35 per troy ounce to a peak of US$873 a troy ounce in January 1980, a gain of 2,395 per cent.
During that period, the only significant correction was from November 1974 to August 1976, when gold fell roughly 50 per cent.
The spectacular part of the upward move got underway in April 1979 and saw gold gain more than 300 per cent in just nine months. As to the tears, well, the bear market for gold lasted until February 2001, a period of 21 years.
Gold lost 70 per cent in all during that period but the good news is it was up more than 600 per cent from August 1971. It took until 2008 for gold to surpass its 1980 high.
Today, it remains 43 per cent above that 1980 high. Gold has been the best performing asset since 2000.
The lengthiest ‘boom-doggle’ of all time
In terms of length, the 1990s High Tech/Internet (or dot-com) boom has thus far been the granddaddy of all bull markets.
The bull got underway in October 1990, although some may argue that the bull really started following the 1987 stock market crash. The 1990 correction saw the DJIA lose 21.2 per cent, barely qualifying it as a bear market. It only lasted three months and much of it was triggered by Iraq’s invasion of Kuwait. However short and shallow it was, though, a recession did follow.
The 1990s bull market lasted until January 2000 for the DJIA while the NASDAQ and the S&P 500 didn’t top out until March 2000. Along the way was the 1998 scare triggered by the Russian default and the near collapse of Long-Term Capital Management (LTCM), a hedge fund that employed mind-boggling leverage.
The LTCM collapse nearly brought down the financial system. The US Federal Reserve stepped in and effectively bailed out the system with a massive cut in interest rates. It poured billions in liquidity into the market, propping up the major financial institutions to prevent an outright collapse.
That in turn steadied the stock markets so the DJIA only fell 19.3 per cent, missing the 20 per cent mark for an official bear market.
During the 1990s bull, the DJIA gained 396 per cent, leaving it short of the gains of both the 1920s DJIA and 1980s Japanese market.
What about the ending? The 2000-02 High Tech/Internet crash chipped about 38 per cent off the DJIA but the real carnage was over at the NASDAQ. A lot of companies simply disappeared.
We are sure people remember names like Pets.com, Qualcomm, Nortel Networks, WorldCom and Enron. During the dot-com bubble, valuations and price-to-earnings (P/E) ratios reached insane levels.
Most of the companies didn’t make any money, spent lavishly, and the buzzword phrase was ‘growth over profits’. They were mainly listed on the NASDAQ and as a result, the exchange soared from 323 in October 1990 to 5,132 by March 2000, a gain of 1,489 per cent. In the dot-com bust, the NASDAQ fell 78 per cent.
One of the interesting aspects of the NASDAQ bubble was a steady rise punctuated by sharp ups and downs from January 1999 to September 1999. During that period, predictions that the NASDAQ would crash became shrill with frequency.
When the bubble breaks . . .
Except it didn’t. The final bubble rise took place as the NASDAQ gained 88 per cent from the final low in September 1999 to the March 2000 top. By May 2000, the NASDAQ had already shed just over 2,000 points with a lot more shedding to come.
In 2016, the NASDAQ finally surpassed its 2000 top. Today, the stock markets have been rising for 100 months and counting. The DJIA has gained 231 per cent, which is not that impressive compared to our historical examples.
The market followed a lengthy period of up-and-down action from roughly May 2015 until the market broke out to new highs in November 2016 after the US election.
However, for the current market to truly be a bubble, we need to hit the point where the market is going up almost every day and everyone is talking about it and telling us how it is never going to end. We haven’t hit that point, yet.
The market keeps rising. That is despite:
• the Fed hiking interest rates;
• the ongoing political machinations in Washington with a president under investigation;
• the ongoing wars in the Middle East, which could take a potentially more dangerous turn after the US shot down a Syrian warplane and Russia effectively said it will impose a no-fly zone over Syria;
• a global economy growing sluggishly;
• a rise in violent clashes in the US between citizens and police and leftist and rightist groups, and;
• overvaluations in the market.
Probably the biggest reason the market keeps moving higher is because of the immense expansion of credit over the past eight years. Debt, globally, has been growing faster than the economy, especially in China. As long as debt keeps on expanding and can be serviced, markets could keep on rising.
Debt collapse brought on the 2008 financial crash and history is replete with debt-related collapses sparking panics, recessions, depressions, civil wars, and wars.
. . . the markets will fall
Is there any reason to suspect this time it will be different? Probably not. The question is when, not if. Long bull markets have historically had a tendency not to end with a whimper but with a bang—a blow off followed by a crash and tears. These are good reasons to suspect that a blow off could come sooner than we suspect.
So where should investors put their money under these circumstances? The technology stocks will probably do well, I suspect. Gold and gold stocks are also perking up now.
I predict we are about to have a correction, thanks to sabre-rattling between the US and North Korea.
Once that correction is complete, we should see one final run up, perhaps the blow off that captivates the general public (and hastens their losses). Then again, instead of a blow off, we could have a feeble rise to new highs as we did in 2007.
No matter what, we are at the end of the cycle after nine years up. I am not optimistic of it ending well. Bond prices are also going to be falling so bonds won’t be a safe haven. Gold will be. Irrespective of this, the 2009 bull market should be over by the first quarter of 2018. Then lights out.
David Chapman is an independent economic and technical analyst. He can be reached at firstname.lastname@example.org or 416-523-5454.
This is an edited version of an article that was originally published for subscribers in the August 25, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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