Thirty years of stock market crashes – and the signs they were coming. Is another stock market crash around the corner? … As the stock market struggles to recover from "Black Monday" in August, many investors are wondering how long it will be before the market regains the levels seen before the crash … Here we look at seven of the stock market setbacks of the past 30 years to see what lessons they hold for investors today. – UK Telegraph
Dominant Social Theme: Once you're in, never get out.
Free-Market Analysis: This Telegraph article was published in mid-October but we have seen many of the data points before and encountered the conclusions before as well.
It is worth examining because these arguments can be persuasive in their own way and counterarguments are not always obvious.
What the article does is examine "30 years of slumps" – putting various stock market "busts" and crashes into context. It covers such crashes as the Program Trade Crash of 1987, the Tech Bubble Crash of 2000 and the Global Financial crisis of 2008.
Other crashes that the article mentions include the 1997 Asian crisis, the Greek Debt Crisis of 2011 and China's recent Black Monday Crash. But the 1987, 2000 and 2008 busts are the ones that the article concludes are truly significant. The article examines these three crashes to see what insights they may offer about the present day, as follows:
What were the warning signs that these great crashes were approaching? John Husselbee, who runs "multi-manager" funds for Liontrust, and has been a fund manager for 30 years, said four key indicators were worth keeping an eye on. "What set the great crashes apart from my perspective were changes – before the market dropped – in what I deem the key indicators of fear: the 'Vix' index, widely known as the fear index; the gold price; the US dollar; and the yield on US government debt," he said …
Other investors point to the importance of the valuation of shares relative to the profits generated. Russ Mould of AJ Bell, the fund shop, said: "Real market accidents tend to happen after a long run of good performance and the appearance of commentary that tries to argue 'it is different this time because of…'. " Other warning signs are when corporate earnings start to disappoint or the economy tips into recession."
These are interesting observations. The article goes on to make a fairly optimistic point regarding how one can deal with such crashes, explaining that "perhaps the most important lesson to glean from the past 30 years of stock market crashes is that even those heavy falls in October 1987 ended up being little more than a stumble in the market's long-term rise … The message here is that those who hold their nerve, investing steadily and regularly, should be able to ride out the storms, particularly when you consider the added power of reinvesting dividends."
As we pointed out above, we've heard this argument before (and so have you). While such perspectives make sense in hindsight, when your portfolio is down 50 percent it's hard to think clearly. Most people tend to overreact and remove some if not all funds to prevent further losses. Thus, they never participate in any market rebound. An initial loss becomes a permanent one.
The Telegraph article is presenting the benefits of a "buy and hold" strategy. In doing so it nonetheless seems to imply that the market is on a downward slope, or at least soon will be. However, the article doesn't present that as a fact but lets the reader draw his or her own conclusions.
An article that is more emphatic about the place of the market in the current business cycle has recently been posted by Charles Hugh Smith whose articles also appear on Lew Rockwell's libertarian website. Smith is fairly sure that markets are entering a steep decline. He writes:
Now that virtually every nation is entering the bust phase, all are being tested. So far, virtually all are in denial and still trying to 'solve" the degrowth/speculative bust reality with the same old financialization tools. That these will fail is as predictable as night following day.
Smith seems certain that the bust phase is imminent because the indebtedness of major nations such as the US, China and Germany are nearing perilous highs.
As a result, elected and appointed leaders try "financialization" to alleviate markets' disturbing volatility and significant retreats. Fixes, he points out, include fiscal and monetary stimulus, lowering interest rates, etc.
These have the same effect as tossing gasoline on a fire. Debt, leverage and speculation are ignited, but since the productive investments have long been made, all that's left is unproductive mal-investment and speculative bet
Very good. This is indeed what is taking place today. On the other hand, Smith's perspective doesn't provide us with a time limit. The US Federal Reserve, for instance, has been stimulating the market for years now without a disastrous crash … yet. Obviously, financialization can take place for a considerable amount of time, at least relatively speaking.
To sum up: One of these market-oriented articles provides us with an analysis of where we might be in terms of anticipating a crash but doesn't draw any firm conclusions. It simply suggests that one might wish to stay in the market no matter what because inevitably the indexes soon rise again to higher highs.
The other article is a good deal more emphatic about where the market is as regards the business cycle – near an extended downturn because leverage is already so high.
We'd tend to agree that the market cycle is a good deal closer to the end than the beginning. And yet, even so, the timing is always in question.
Given the inflationary nature of the current market run-up and the bubbles that have obviously been created, predictions could have been made for several years now that this latest global boom needed to turn to a bust sooner rather than later. And still, to a degree, it has persisted.
It may, in fact, pop today. Or it may persist longer, even far longer. In the past we suggested a real downturn might come not this year but next. But who is to say it might not run several more years yet?
This is the frustrating issue when it comes to markets. We can understand the mechanism of the market cycle and its trigger – monopoly fiat stimulation – but no one has ever created a system that can without fail predict when the crack-up will occur.
However, if one resigns oneself to this inevitability some worthwhile insights may be absorbed. First, there are surely general signs of toppy markets – as we can see from the above analyses – and given such signs one might wish to reduce one's exposure without removing all of one's funds.
Second, and just as importantly, a portion of one's equity position might be prudently shifted to non-public enterprises in promising sectors. We've mentioned this before and have indicated that a promising sector in this regard is very obviously cannabis.
Please recall Daily Bell chief editor Anthony Wile has recently written on the cannabis sector suggesting that investors take their time before making a commitment, as the sector is in flux. Just today Canada's national newspaper, The Globe and Mail, published an editorial from Anthony Wile entitled "Investors Should Take a Deep Breath Before They Try Cannabis." Nonetheless, pre-public enterprises may present a significant alternative in a volatile market, as they are not exposed to "fear and greed" in the manner of public markets.
Whatever strategy you choose, it is probably a good idea to be an active investor who does respond to changing market signals with portfolio adjustments. Free-market economists have provided us the tools to understand the business cycle and how investment marts react to it. We should use this knowledge to reconfigure prudently as necessary.
Here at The Daily Bell, we will continue to attempt to alert readers about changes in the cycle and ways that one can take advantage of them – especially via pre-public investments in selected sectors. The Daily Bell offers Anthony Wile's book Financial Freedom, on sector analysis, free when you sign up for The Daily Bell Newswire.