This Week’s Message: Some History, And a Test of the Most Basic Investing Concept

While the stock market bounce off the lows to this point seems big on a percentage basis, considering the depth of the original selloff and the level of retracement thus far, it’s, at best, run of the mill compared to other such bounces historically.

Typically, the first phase (liquidity panic) bear market (or correction) selloff gets retraced by at least 38%, which we’ve now achieved. More often we see retracements of 50% to 62% (sometimes 76%). 

A few recent examples: 
The 2015 selloff was retraced right to 50% before retesting the initial low. The 2016 retracement rolled back over between the 38% and 50% levels. The early 2018 correction saw a 76% retracement before it rolled back over. The 20% correction of Q4 2018 experienced an early rally that retraced right to 62%, rolled back over to the initial low, then retraced 62% again, before finally plunging to the ultimate bottom.

Now, considering today’s experience within the context that counts — fundamental reality — put simply, we are literally experiencing the greatest supply and demand shock the world has ever seen, and we’ve honestly no clue as to when it’s going to end. And stocks are merely 20% off of their all time highs!

So, yes, technically-speaking (as I’ve charted), the latest makes perfect historical sense, but fundamentally-speaking it’s utter nonsense. Unless of course virtually unlimited monetary and fiscal stimulus can save the day. 

And let’s say that it can: Well, then, that has to mean that we’ll never have to worry about bear markets ever again, as it will have been proven that unlimited stimulus can indeed stamp out devastating stock market declines. And if that indeed turns out to be the case, then of course the days of real wealth-producing stock market returns will be gone as well, as the one concept of investing that supersedes all others is that of risk and reward: If there’s to be no real (inflation-adjusted) risk, there’ll be no real reward.

Today’s action and more history:

Stocks were able to keep their rally today, SPX up 3.4%.

Headlines suggest that it’s optimism over the covid-curve, prospects for further global stimulus, and a pending OPEC/Russia oil deal.

Charting the latest action against bear markets past, while all of them feature counter-trend rallies like the one we’re presently experiencing, the similarities this go round to 1929 are striking:

Click each insert below to enlarge…




Now — as eerie as the 1929 analog is — I don’t want to make too much of it. I’m definitely a critic of scare-mongers toting Great Depression charts. That said, there’s this human nature thing that plays itself out, over and over again, under various conditions. And that’s something we have to take into account…

From this point in 1929 the market dipped back roughly 10% (stopping short of the first low), then rallied to just above a 50% retracement of the bear market over the following 4 months (6 months altogether from the first low), before rolling over for good:

Yes, absolutely, the world is vastly different today than it was in 1929, but, again, investor/human nature has remained essentially the same.

My ultimate point being that while history certainly won’t repeat, it does offer strong evidence that the present bear market may be far from over.

Just in case you need convincing on my human nature point, here’s from John Kenneth Galbraith’s indispensable book The Great Crash of 1929 (should sound familiar):

“Government securities were purchased in considerable volume with the mathematical consequence of leaving the banks and individuals who had sold them with money to spare.”  

“The funds that the Federal Reserve made available were either invested in common stocks or (and more important) they became available to help finance the purchase of common stocks by others. So provided with funds, people rushed into the market. Perhaps the most widely read of all the interpretations of the period, that of Professor Lionel Robbins of the London School of Economics, concludes: “From that date, according to all the evidence, the situation got completely out of control.””

Thanks for reading!


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