Despite the recent fix, and whatever popular metric you use; PE, Shiller CAPE ratio or Buffett market / GDP comparison; it is one of the most expensive markets since 1923. The other two were the markets of 1929 and 2000 and we know how they went. By the way, 1923 was the year when the "Composite Index" was introduced, the forerunner of the S&P 500.
The record shows that if stock prices can stay high for long periods of time, they will eventually return to average. This can happen in two ways. Either the market moves for a long time until profits catch up, or there is a sharp drop to align prices with historical PE ratios – a reversal of the average. History has shown that investors are not a group of patients. They will tolerate a side market for a while, but they will eventually tire of the meager returns and put their money to work where they believe they have the greatest earning potential. Once the ball rolls, the market comes out in droves and a severe bear market sets in. Result: there is a sharp drop in the store market.
The question is when and what past correction was a hiccup or a prelude to the deep dive. A study of the main bear markets indicates that the latter is more likely. Indeed, an examination of market declines of more than 28% since 1923 reveals that there is always a preamble to every major bear market. Some people have the mistaken impression that stock market crashes occur at the top of the market. This is far from the truth.
The stock market may be capricious, but providence is kind. It always gives us advance notice of an upcoming crash, drawing our attention to the midst of our complacency with a surprise fall and offering the option to get out before it hangs seriously. This is illustrated in the analysis below for each of the following main bear markets (down 28% or more): 2007, 2000, 1987, 1973, 1968, 1962, 1946, 1937 and 1929. Intraday prices and daily closings are only available for the S&P 500 from 1950. Therefore, Dow Jones Industrial Average closings were used for markets before this date.
The initial market peak of 2007 occurred on July 17 when the S&P 500 had an intraday peak of 1555.90. The index would drop next week and eventually settle at an intraday low of 1370.60 a month later on August 16 – a drop of 11.9%. Now all ups and downs are intraday unless otherwise noted. The market would climb for seven weeks to reach a market high for the index of 1576.09 on October 11, 2007 – 1.3% more than its previous peak. An initial drop of 5.5% was followed by a rapid recovery to 1552.76 on October 31, before succumbing and falling 10.8% to a low of 1406.10 on November 26, 2007. L & The index would recover to a peak of 1523.57 and continue on a series of lower lows and highs to its nadir of 666.79 March 9, 2009 for a drop of 57.7%.
The 2000 market gave many warnings before the fall of Dot.com. The market fell just after the January 3 opening. After reaching a high of 1478, the S&P 500 fell to 1455.22 at the close. It sank below 1400 the next three days and returned to 1465.71 – the high of January 20, 2000. From there it went on a roller coaster ride to its lowest of 1329.15 February 25 – down 10.1% from its high so far. The market finally reached its peak at 1552.87 on March 24, 2000. It would drop precipitously on April 14 to reach a minimum of 1339.40 – a decrease of 13.7% – but would recover slowly to 1530.09 on September 1 2000, only 1.5% below its absolute record. Thereafter, it fell steadily with a few marked drops followed by rallies but only on the downtrend line. The market reached a low at 775.80 on October 9, 2002 for a drop of 50.1%.
The bear market in 1987 was rapid. After reaching a peak of 337.89 on August 25, 1987, the S&P 500 fell to 308.58 on September 8 – an 8.7% hit. It quickly climbed to 328.94 on October 2, just 2.6% from its highest. It vacillated until a close below 300 on October 15 before crashing the following Monday to close at 224.84 – a loss of 20.5% for that day. It would close lower on December 4, 1987 at 223.92 but the low point for the movement occurred the day after the fall, October 20, when it plunged to 216.46 for a loss of 36.0% compared to the higher in August.
This market, along with the 1968 bear market, was part of the mega bear market spanning 1967 to 1982. The S&P fluctuated between 100 and 110 for most of the year. It crossed the barrier of 110 at the end of the summer to fall back below before reappearing its final appearance at the end of the year. It peaked at 119.79 on December 12, 1972, then fell 4.3% to 114.63 on December 21, 1972. The new year propelled the index up to reach a high of 121.74 on January 11, 1973 – a gain of 1.6% over the previous high. It quickly dropped to 111.85 on February 8, then continued its descent on a series of bumps until reaching the lowest at 60.96 on October 4, 1974 – a loss of 49.9%.
After a first decline to start the year, the market climbed steadily from March to November and finally reached December 2, 1968 when the S&P 500 peaked at 109.37. The index dropped to 96.63 on January 13, 1969 (a drop of 11.6%), jumped in its rally to 0.43 point from the March 17 low, then rallied to # 39 ; to 106.74 on May 14, 1969. After reaching 2.4% of the peak, it finally succumbed, reaching the bottom on May 26, 1970 at 68.61. It was a 37.3% haircut.
The stock market steadily climbed from October 1960 to December 1962 when the S&P 500 peaked at 72.64 on December 12, 1962. It then fell to 67.55 on January 24, 1963 for a loss of 7, 0%. The index quickly returned to 70 next week and posted a slight gain the following month, finally peaking at 71.44 on March 15, 1.7% below the highest. Thereafter, the index plunged to 51.35 on June 25, 1962 for a drop of 29.3%.
The market had been in ruins since the end of World War II and started in the same way in 1946, gaining 8% in February. The intraday highs and lows of the S&P 500 were not available for analysis. Therefore, the closing of the Dow Jones industrial average will be used. The Dow Jones closed at 206.61 on February 5, 1946. The index then plunged 10% to close at 186.02 on February 26. He quickly recovered from his previous high and surpassed it on a horseback ride until 212.5 May 29, 1946 – a gain of 2.9% from its previous high. The bumpy climb continued until August when the index reached 204.52 on August 13 and then fell into exhaustion and finally closed at 163.13 on October 9, 1946 for a decrease of 23.2%. Despite a number of rallying attempts, the market will continue to struggle until February 1948 with a maximum loss of 28%.
After an abrupt fall from 1929 to 1932, the market appeared to be in recovery mode until it reached a plateau in early 1937. The Dow Jones closed at 194.4 on March 10, 1937 for mark the end of the uptrend. The index then drifted down for three months to its low on June 14, 1937 at 165.51 for a loss of 14.9%. It spent the next two months on a steady climb, eventually reaching 189.34 on August 16, 2.6% below the previous peak. It was his last hurray as the market plunged 49.1% at its close from Dow Jones to 98.95 on March 31, 1938.
Just like the market of 2000, the Big Crash of & # 39; 29 gave many warnings. After falling during the first half of the year, the market was corrected 10.0% from a 326.16 Dow Jones closed on May 6 to 293.42 on May 27. Thereafter, it remained untamed until reaching the top of the market on September 381.17. , 1929. It drifted down, slowly at first, but then gained momentum until it bottomed out on Friday October 4 with a Dow Jones close at 325.17 – a loss of 14.7%. He made a mad effort to recover next week, but could only manage one 352.86 at the end of October 10. At 7.4% lower than the September peak, it was the lowest percentage close to a previous high in one of the major bear markets. Again, he was the grandfather of all the bears. Ten trading days later, on October 24, the index closed below 300. It plunged on Monday October 28 and again the next day at 230.07. The market continued to fall until finally reaching July 8, 1932, when the Dow Jones closed at 41.22 for a record decline of 89.2%.
Historical data shows that every major bear market since 1923 has always warned investors. After apparently peaking, they experienced a significant decline before only rising and then collapsing. In two cases, 2000 and 1929, he issued two warnings; the first a correction months before the peak and the second after the peak.
The declines after the initial peak ranged from 14.9% to 4.3% with an average of 10.8% and a median of 11.6%. In three of the nine cases, 2007, 1973 and 1946, the second peak was lower than the first. The range was from a loss of 7.4% to a gain of 2.9% with an average of -1.4% median of -1.7%. If we subtract the outlier of 7.4% from 1929, the average was -0.63% and the median of -1.6%. The time between the two peaks ranged from 30 days to 5.4 months with an average of 96.7 days and a median of 93 days.
Starting from the premise, we are in the early stages of a major bear market and after undergoing a 10% correction, what do we have in store for us? By examining the data, it turns out that we are average. There did not appear to be a relationship between the severity of the bear market and the time interval between the two peaks. However, five of the six times the market has been in good faith corrected, 10% or more, it has taken months, between 2.9 and 5.4 months, for the market to reach its peak and seriously begin its recession . The notable exception was the crash of 1929, which only took 37 days between the first and the second peak. While there was no consistent pattern for the depth of the initial and total declines, it is notable that the four largest initial declines resulted in declines of 49% or more – a level reached only by the bear market in 1973 after only 4.3% decline. There is no discernible relationship between the initial decline and the second peak level, nor the total decline and the second peak level.
Morgan Stanley's prediction on Monday that a slowdown may begin in the second quarter may be correct. We have already exceeded the level of -7.4% from 1929, so it would seem that this market is not very well correlated with it and the expectation of the next decisive peak will be measured in months. Anyway, I recommend everyone to watch the market very carefully. If the S&P 500 is approaching 2.6% from the peak of 2872.87 on January 26, or 2798, this is your signal to exit the stock market. No sense of being hungry for 1 or 2 percent gains and risk losing a lot more.