Rarely do I get too much professional inspiration from the cover of the NY Post, but this morning’s headline is a bit of a classic:
Bad Old Days. NYC was awash with harassing Squeegee guys, and Times Square wasn’t yet an urban Disney Land. For many market participants, the Bad Old Days were slightly more recent, the dot com bust and the 3 year bear market that followed, and then the financial crisis in 2007-2008 that then found its way to Europe and really hasn’t ended. The point is, the Bad Old Days will always influence those who have lived through them, and looking back on my career that started in 1997, and in that time having seen two market crashes, I sometimes have a hard time remembering when exactly the Good Old Days were. So here it is, a sort of play by play for me:
1997: on Oct 27th, the Dow Jones had its worst one day drop (to that point) of 7.2% on the heels of a brewing financial crisis in Asia. From Bloomberg (emphasis mine):
The Dow industrials fell 554.26 to 7161.15, led by Merck & Co. and J.P. Morgan & Co. In the broader market, the Standard & Poor’s 500 declined 64.66, or 6.9 percent, to 876.98. Apple Computer Inc. was the only stock in the S&P index to rise
Despite the SPX’s 33% return in 1997, there were two peak to trough declines of at least 10%:
1998: Too Big to Fail was essentially born that year as the collapse of Long Term Capital Management caused a route in global markets, with the SPX down 22% from its July all time high to the October lows. By year end though the index was at a new all time high closing up 28%:
1999: Partying like it was 1999? Well, the headlines were certainly good, and frankly I can’t remember what caused the 13% peak to trough decline (Y2K fears??) from mid July to mid Oct, but it really didn’t matter as once again the SPX closed at the dead high on December 31st. The dead high of the Millennium:
2000: This one was a doozy. Two nearly 14% declines (one from the all time highs) and then another after a bounce. This was obviously a topping process, and the SPX only closed down 9% on the year, after registering average gains of 28% since the start of 1995:
2001/2002: this was a sort of train-wreck for most involved. No use in even trying to highlight the 10% peak to trough declines, because there were no troughs, the SPX closed down about 33% over the two year period:
2003 – 2006: these were definitely some Good Old Days, with the index up 80% from the lows in March 2003 to the close in 2006. After the low was put in the largest peak to trough drawdown was about 9% in 2004, with a 7% decline in 2005 and an 8% decline in 2006:
2007: this was clearly a redux of the bad ol days, much like 2000, the SPX started to get a bit whippy with two 10% peak to trough declines in a year that saw 5% gains and traded in a fairly narrow range of about 10% for the SPX:
2008: not a good year, SPX closed down 36%, you all know what happened, but barely an uptick, and the financial system as we know it might have collapsed if Central Bank intervention was not as fast and forceful as it was:
2009: much like 2003, the market bottomed in March and saw a series of higher lows and higher highs, with one peak to trough decline of about 9% with the SPX ending the year up almost 26%, truly remarkable. Coincidentally, the year I started my financial punditry, would not like to go back and hear some of my early observations:
2010: was a bit trickier despite its near 15% gains in the SPX. Volatility ruled for the better part of the year as investors weighed the course of QE and we had a Flash Crash which shook some of the confidence in electronic trading. There was a peak to trough decline of 17%, 10%, 9% and 8% before the SPX closed at the highs of the year:
2011: This really should have been the one, with the European Debt crisis brewing, and the fate of QE was still deliberated daily. Volatility ruled with the SPX trading in a massive range between 1370 and 1070, closing up only 2% and having three moves of 10% or greater:
2012: a bit of a redux of 2011, but Euro Sovereign debt crisis was in full swing. ECB head Draghi said he would do what ever it takes to keep Eurozone together, and that was good enough for U.S. investors. Despite two sell offs from highs averaging about 10%, the SPX closed very near new all time highs:
2013 to present: This is what’s most important right now, and you know the drill. This is a beautiful uptrend without a single 10% peak to trough decline, the greatest equaling about 7.50% And this is what should make you worried. This could have been said, at any point during the last 18 months, but regular readers of the site know that we are also worried about the growing list of divergences coupled with weakening breadth with the backdrop of a never-ending list of geopolitical headwinds.
And lastly, this is the chart that scares the crap out of me, the SPX chart since 1994:
So throughout my career, while it has looked easy to be long stocks in the long run, its hard to look back and say the last 20 years has been the good old days for those who have watched every tick. Two massive asset bubbles have inflated and burst and when they did the unprotected saw their portfolios cut in half or worse. Now for those who never look, and never adjust fine, you are doing ok with dividends etc, but for most of us we make some pretty poor decisions when euphoria is at its heights and despair at its depths!
Oh, and lastly the VIX over the last 20 years shows that despite the recent bounce, we are at historically very depressed levels, and it closed yesterday at 16.66 (ominous I know):
SO are we about to see a replay of the Bad Old Days? I honestly have no clue, but given the strength in bonds, growing divergences and weak breadth in U.S. equities, the correction in Europe and the mounting geopolitical risks, this does not look like a great place to commit new cash to equities. If you have to buy the dip, cause it has worked so well, I think it would be prudent to see how the SPX acts at its 200 day moving average, also the uptrend that it has not broken since late 2012 (back near 1860 in the SPX). Just a few thoughts from a guy who’s seen his share of “Bad Days” in the markets.