Despite the recent correction and no matter which popular metric you use; PE, Schiller’s CAPE ratio or a comparison of Buffett’s market to GDP; it is one of the most expensive markets since 1923. The other two were the 1929 and 2000 markets, and we know how they turned out. By the way, 1923 was the year in which the Composite Index, the predecessor of the S&P 500, was introduced.
The record shows that while stock prices may continue to rise for a long time, they eventually turn to the average. This can happen in one of two ways. Either the market is on the sidelines for a long time until profits catch up, or there is a sharp decline to bring prices in line with historical PE-to-average ratios. History shows that investors are not a patient group. They will put up with a foreign market for a while, but will eventually get tired of the meager return and invest their money to work where they think will bring more potential for profit. Once this ball is rolled, the market leaves en masse and a heavy bear market is imposed. The result: there is a big drop in the market.
The question is when and whether this past correction is a hiccup or a prelude to the great decline. A study of major bear markets shows that the latter is more likely. In fact, a review of the 28 percent decline in the market since 1923 reveals that there is always a preamble to every major bear market. Some people have the misconception that stock market crashes happen at the top of the market. This is far from the truth.
The stock market may be volatile, but providence is sweet. It always notifies us in advance of an impending catastrophe, grabs our attention amidst our complacency with a sudden fall, and provides an opportunity to get out before it collapses seriously. This is shown in the analysis below for each of the following major bear markets (28% or more decline): 2007, 2000, 1987, 1973, 1968, 1962, 1946, 1937 and 1929. Intraday prices and daily closures are only available for the S&P 500 from 1950 onwards. Therefore, the Dow Jones Industrial Average closures had been used for markets before.
The initial peak for the market in 2007 came on July 17, when the S&P 500 had an intraday peak of 1555.90. The index will fall next week and eventually settle to its lowest level in the day of 1,370.60 a month later on August 16 – a drop of 11.9%. From now on, all peaks and troughs are within the day, unless otherwise stated. The market will rise for seven weeks to reach a market peak for the index of 1576.09 on October 11, 2007 – 1.3% higher than its previous peak. The initial decline of 5.5% was followed by a rapid recovery to 1552.76 on 31 October, before giving in and falling 10.8% to a bottom of 1406.10 on 26 November 2007. The index will recover to a peak of 1523.57 and will continue on a series of lower levels and reached its highest value of 666.79 on March 9, 2009 for a decline of 57.7%.
The 2000 market gave many warnings before the fall of Dot.com. The market shook immediately after the opening of the New Year on January 3. After reaching a peak of 1478, the S&P 500 fell to 1455.22 at closing. It fell below 1,400 over the next three days and recovered to 1,465.71 – the highest of January 20, 2000. From there it dropped to the lowest level of 1,329.15 on February 25 – a 10.1% drop from the highest so far. The market finally peaked at 1552.87 on March 24, 2000. It would fall sharply on April 14 to the bottom of 1339.40 – a decline of 13.7% – but then slowly recovered to 1530.09 to September 1, 2000, only 1.5% below its highest value. Then it steadily declined with some sharp declines, followed by rises, but only to the line of a downward trend. The market bottomed out at 775.80 on October 9, 2002, down 50.1%.
The bear market in 1987 was fast. After fluctuating to a peak of 337.89 on August 25, 1987, the S&P 500 fell to 308.58 by September 8 – a blow of 8.7%. It quickly recovered to 328.94 by October 2, only 2.6% less than its highest level. It shook to close below 300 on October 15, before collapsing the following Monday to close at 224.84 – a loss of 20.5% for the day. It will close lower on December 4, 1987 at 223.92, but the lowest point for traffic came the day after the crash, October 20, when it fell to 216.46 for a loss of 36.0% of the maximum for August.
This, together with the bear market since 1968, was part of the mega bear market, which covered 1967-1982. S&P fluctuated between 100 and 110 for most of the year. He overcame the 110 barrier at the end of the summer, only to dive under it again before making his final jump at the end of the year. It peaked at 119.79 on 12 December 1972 and then fell 4.3% to 114.63 on 21 December 1972. The new year pushed the index higher, peaking at 121.74 on 11 January 1973 – an increase of 1.6% from the previous peak. It quickly fell to 111.85 by February 8 and then continued to move down through a series of blows until it hit bottom at 60.96 on October 4, 1974 – a loss of 49.9%.
After an initial decline at the beginning of the year, the market rose steadily from March to November, finally reaching December 2, 1968, when the S&P 500 peaked at 109.37. The index fell to 96.63 on January 13, 1969 (down 11.6%), falling within 0.43 points of the lowest level on March 17, and then rising to 106.74 on May 14, 1969. After entering within 2.4% of the top he gave in, finally hitting the bottom on May 26, 1970 at 68.61. That was a 37.3% haircut.
The stock market rose steadily from October 1960 to December 1962, when the S&P 500 reached 72.64 on December 12, 1962. It then fell to 67.55 on January 24, 1963, with a loss of 7.0%. . The index quickly returned to 70 the following week and recorded a small gain the following month, finally peaking at 71.44 on March 15, 1.7% below the maximum. The index then fell to 51.35 on June 25, 1962, down 29.3%.
The market was torn by the second part of World War II and began in 1946 in the same way, gaining 8% by February. Internal highs and lows for the S&P 500 were not available for analysis, so the Dow Jones Industrial Average closures will continue to be used. The Dow Jones closed at 206.61 on February 5, 1946. The index then fell 10% to 186.02 on February 26. It quickly regained its previous peak and surpassed it to 212.5 on May 29, 1946 – an increase of 2.9%. from its previous peak. The unequal journey continued until August, when the index reached 204.52 on August 13 and then fell from exhaustion, finally closing at 163.13 on October 9, 1946 for a drop of 23.2%. Despite a number of rally attempts, the market will continue to struggle until February 1948 with a maximum loss of 28%.
After a sharp decline from 1929 to 1932, the market seemed to be in recovery mode until it reached a plateau in early 1937. The Dow Jones closed at 194.4 on March 10, 1937, to mark the end of an upward trend. The index then fell for three months to the bottom on June 14, 1937 at 165.51 for a loss of 14.9%. He spent the next two months in a steady climb, which eventually reached 189.34 on August 16, 2.6% below the previous peak. This was his last hurray, as the market fell 49.1% to 98.95 on March 31, 1938, when the Dow Jones closed.
Like the 2000 market, the Great Depression of ’29 gave many warnings. After deviating to the side in the first half of the year, the market went through a correction of 10.0%, when it fell from 326.16 Dow Jones on May 6 to 293.42 on May 27. It then rose fearlessly until it peaked at 381.17 on September 3. , 1929. At first it fell, slowly, but then gained momentum until it reached its lowest point on Friday, October 4, closing the Dow Jones with a loss of 325.17 – 14.7%. He made a crazy effort to recover next week, but managed to manage only 352.86 close to October 10. At 7.4% lower than the September high, it was the lowest percentage near the previous peak in each of the major bear markets. On the other hand, he was the grandfather of all bears. Ten days later, on October 24, the index closed below 300. It fell on Monday, October 28 and closed again the next day at 230.07. The market continued to fall until it finally bottomed out on July 8, 1932, when the Dow Jones closed at 41.22 for a record decline of 89.2%.
Historical evidence shows that every major bear market since 1923 has always provided investors with a warning. After seemingly reaching their peak, they went through a significant decline before rising again to fall afterwards. In two cases, 2000 and 1929, he issued two warnings; the first correction months before the peak and the second after the peak.
The declines after the initial peak range 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 median of -1.4% of -1.7%. Subtracting from 1929, a 7.4% deviation, the mean is -0.63% and the median is -1.6%. The time between the two peaks varies 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 big bear market and after going through a 10% adjustment, what awaits us? Examining the data, it turns out that we are average. There seems to be no connection between the weight of the bear market and the time between the two peaks. However, five of the six times the market has undergone a bona fide adjustment, 10% or more, it took months, between 2.9 and 5.4 months, for the market to peak and begin a sharp downturn. The notable exception was the 1929 disaster, which lasted only 37 days between the first and second peaks. Although there is no consistent pattern for the depth of the initial decline and the overall decline, it should be noted that the four largest initial declines led to a decline of 49% or more – a level achieved only by the bear market since 1973 4.3%. . There is no visible link between the initial decline and the second peak level, nor the overall decline and the second peak level.
Morgan Stanley’s prediction this Monday that a second-quarter delay could be expected may be correct. We have already exceeded the level of -7.4% since 1929, so it seems that this market does not correlate so well with this one and the wait until the next decisive peak will be measured in months. Nevertheless, I would warn everyone to monitor market developments very closely. If the S&P 500 falls within 2.6% of the peak of 2872.87 on January 26, ie. 2798, this is your signal to exit the stock market. There is no point in being greedy for the last 1 or 2 percent of profits and risking losing much more.