What year is it?

That seems to be one of the themes that keeps popping up lately. What year is 2013 like? Is it 1999 and we are about to crash? Is it 1982 and we are on the verge of a multi-decade bull run? Or are we heading for a 1987-like debacle?

The answer is none of the above. The circumstances today do not have any exact parallel to prior years or cycles. A quote often attributed to Mark Twain* is that “History does not repeat itself, but it does rhyme.” My favorite rhyme this cycle has been 1973-74. I have referenced that repeatedly during and after the 2008-09 crash. To me, the 56% fall and ~74% snapback rally was hard to argue against as the closest historical analogy.

That is, until ZIRP and QE1-4 began. An FOMC engineered 145% rally off of the lows at a 0% Federal Funds rate is simply a case of first impression. There are no historical analogies to the current circumstances. The Fed action has shifted the context debate into a new dimension.

Now before you go accusing me of saying that phrase, a brief word: Many people seem to misunderstand the context of Sir John Templeton’s famous quote: “The four most expensive words in the English language are “this time it’s different.” I have always interpreted that to refer to the fact that since human nature is unchanging, it is never different this time. But this truism does not mean we should not discern different circumstances that drive investors at different parts of the markets cycle. Facts can and do differ. That has major repercussions — at least over the short-to medium term.

How might the Fed engineering of the post-credit crisis recovery manifest itself? I can imagine three possibilities:

1) Stopping the natural recessions and corrections;

2) Skipping the last 5 years of the secular bear market (Its 1982!)

3) Driving us straight to 1987

Let’s briefly consider each of these.

What does it mean that the Fed has stopped the natural recessions and correction cycles? Here we are are, almost five years post the last recession start — and the economy continues its modest recovery. This is what Reinhart & Rogoff paper — the good one — forecast. FOMC policy is stimulating demand for anything credit-driven. This includes corporate CapEx spending, consumer auto purchases and of course Housing. I do not know of any parallels to these circumstances.

Option 2 is skipping the last 5 years of the secular bear market and fast forwarding us to 1982. Problem is, P/E ratios never quite got low enough and dividend yields never got high enough. However, the credible counter argument is simply low rates removed the expected competition. Without risk-free US Treasuries yielding 14%, the major competitor to equities never materialized. Hence, stocks were prevented from finding their natural floor.

The final option is that the Fed is driving us straight to the 1987 crash. Professional money managers have been forced in; dividend stocks are the new treasuries. Even mom & pop are starting to look at the stock market. The flip side of this is that after nearly 40 months of outflows from equity funds, we now have but 5 consecutive months of modest (at best) inflows. Bond funds are still attracting more dollars.


There are lots of other factors affecting markets: Taxes are low, Asia’s development, contained labor costs, international market expansion, productivity gains, practically free credit. Hence, why I say there are no direct paralleles to the current circumstances in the market’s history books.

You Humans are the same as you have ever been. Your cognitive biases and emotional (over)reactions are no different than they have ever been. But the circumstances in which you make risk/reward decisions, the context of your investing analyses, are vastly different than what we have become accustomed to.

I suspect this change of context may surprise all of us . . .



*  There is no actual written Twain quote to that effect; The closest version is “It is not worth while to try to keep history from repeating itself, for man’s character will always make the preventing of the repetitions impossible.” (Mark Twain in Eruption: Hitherto Unpublished Pages About Men and Events, edited by Bernard DeVoto, 1940).

Category: Investing, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

40 Responses to “What Is Your Market Context?”

  1. PeterR says:

    “My favorite rhyme this cycle has been 1073-74.”

    I think you mean 1973-74?

  2. ironman says:

    Perhaps the market has entered a very different kind of period and truth be told, outside of QE 2.0, it’s one that has been exceptionally driven by fundamentals.

    • Concerned Neighbour says:

      If the fundamentals are so sound, then why doesn’t the Fed at least scale down its asset purchases? Without their open-ended and ever-expanding QE, I highly doubt the “markets” would increase ridiculously in perpetuity as they are now.

      These “markets” are an absolute farce. Losing a point on the S&P is an epic struggle, while a 1% gain is like putting a hot knife through butter.

      But maybe I’m wrong. Maybe the fundamentals are so outstanding that DOW 36K (and Amazonian P/E’s for all) are justified.

  3. [...] Barry: Stop looking at the market through the lens of whatever your first year investing was.  (TBP) [...]

  4. rd says:

    Stopping the natural recessions and corrections……..Huh?

    We had a mild recession in 2000 and a severe one in 2008. Neither have had particularly stellar recoveries for the median person.

    The Fed has been a willing participant in creating conditions that lead to boom and bust cycles, including the conditions for a financial crisis. However, they have then poured on the medicine to help remedy the problem after the bubbles burst unlike the 1930s. I don’t see any evidence that they have stopped the cycle, but they do seem to have been able to prevent the 1930s from recurring.

    My gut feeling is that we are seeing a mirror image of the 1966 to 1982 markets where the driver is deflationary instead of inflationary pressures.We had our 1966 Nifty 50 euphoria with the dot.com bubble. A few years later we went through our own financial restructuring similar to leaving the gold standard and the oil embargo but this time we built up a massive unstable debt overhang during that period, so we had our inflation during the equivalent of the 1966-73 period when the US was struggling against the requirements of the gold standard. We are now in the equivalent of the late 70s but we are now trying to figure out how to get rid of the debt without massive deflation instead of the massive inflationary burst that hit the system when the Fed was unable to adjust to leaving the gold standard.

    I think we will see a repeat of 1981-82 in the stock market (inflation adjusted) as we go through the last phases of coming to grips with the societal debt load. It is unclear who will be the leaders in resolving this. The Fed has done their ZIRP and QE to prevent the 1930s but I don’t see many new weapons in their quiver to finally resolve what is really a fiscal problem. Some new political leadership will need to step up to come up with rational policies for moving forward – I don’t see the current Congressional and Administration leadership as up to the task.

    The real wild card is the rest of the world. There are serious imbalances out there of a similar magnitude as early i nthe century that led to two massive world wars. Can the world get out of this fiscal crisis without going to war?

    • Mild recession in 2000? I beg to differ!

    • NMR says:

      “Can the world get out of this fiscal crisis without going to war?”

      Who is going to fight whom?

      • rd says:

        Saber rattling in Korea.

        Japan and China have a pissing contest over islands surrounded by resources.

        Europeans don’t like each other. Historically, they beat ploughshares into swords about once every 50 years or so. The breakup of Yugoslavia is a classic example of how fast, violent, and hateful this region can become.

        The Arab Spring may be only partially sprung. Still lots of simmering tensions in the Middle East (Syria is a pot at a rolling boil, Egypt is still set on simmer).

        Pakistan and India REALLY don’t like each other. Pakistan is becoming less stable over time. India has its own internal issues.

        A commodity price collapse would put Russia into play for instability.

        Other than that, I can’t think of too many candidates to start a war. The US is unlikely to replay the War of !812 and invade Canada, so North America should generally be ok although the recent gun control debate has exposed a lot of people out there who are willing to go out and fight tyranny (government).

      • Chad says:

        All of Africa – Proxy wars by US and China supported nations. They probably won’t be as hot as during the Cold War. Or, a Muslim Brotherhood Egypt decides to “unite” the Arabs.

        China v India – They don’t get along great either. Not as bad as India v Pakistan.

        The one indicator that really bothers me is the ratio of young Chinese men to women (roughly 30 million more young men to women by 2020). Historically, this has been a prelude to war (internal or external).

      • rd says:

        Your last point has been bothering me for quite a while. The one child policy with the societal preference for sons is creating a huge quantity of young men that won’t be able to be married because more societal norms say they won’t marry non-Chinese.

        Historically, excess unemployed and unmarried young males is a major source of unrest in countries – the Arab Spring had this as one factor. China has been able to offer jobs so far but slowing growth may imperil that. Blaming problems on the rest of the world instead of internal policies is a classic deflection tactic used by politicians. The resulting war then is a good way to rebalance your population and eliminate the excess young males.

      • PeterR says:

        NMR, your question “Who is going to fight whom?” brought to mind a bumper sticker seen years ago in The Hamptons:

        “Eat the Rich”

        The “serious imbalances” to which rd referred are very real IMO, and scarier than is generally perceived, let alone acknowledged.

        The next “war” may stretch the definition a bit . . .

    • Petey Wheatstraw says:

      “The real wild card is the rest of the world. There are serious imbalances out there of a similar magnitude as early i nthe century that led to two massive world wars. Can the world get out of this fiscal crisis without going to war?”

      Abenomics. Are we destined to follow Japan’s lead? Currency wars, anyone?

      Or is all of this positive or, at a minimum, benign?

      BR said:

      “I suspect this change of context may surprise all of us . . .”

      That is a certainty. Good surprise or bad? That’s the $ Gazillion question.

      “You Humans are the same as you have ever been.”

      Are we going to get a free lunch, after all?

  5. MarketStudent says:

    Given the y-t-d trade action, I’d say it closely mirrors years like 1954 and 1995. Both were breakout years with stellar returns and shallow price pullbacks that lasted at most a few days. A secular bottom may have been reached in 2011 similar to 1982. It’s only the last few months of 1982 and its respective breakout that seem similar to today. The 1929 nominal Dow high that preceded the Great Depression was first exceeded in 1954. The 2007 nominal high that preceded our “great recession” has now been exceeded in 2013. Perhaps 2013 becomes our version of 1954. Only time will tell.

    • Very interesting comments — I will do some research and see how that holds up.

      Thanks for posting!

      • MarketStudent says:

        Thanks for reading my comments. I look forward to what your research finds. My big struggle with my comments are whether the fundamentals can justify such a continued robust move and how much of a Fed/monetary stimulus premium is already built into equity prices. Interestingly, re: the 1973 and 2000 highs, it took about 7 yrs. & 7 mos. for the S&P to reach a new peak (1/11/73 & 8/22/80) and 7 yrs. & 2 mos. to reach a new peak (3/24/00 & 6/4/2007) using S&P 500 nominal closing prices. In our current scenario, our first new closing peak occurred on 3/28/13, about 5 yrs. & 6 mos. since the 10/9/07 peak. This more rapid recovery in terms of duration despite a more severe bear market in ’07-’09 may be indicative of a Fed premium embedded in equity prices. After that first new peak in 1980 and 2007, a new bear market commenced in a few months.

    • rd says:

      The market plunged 90% from 1929 to 1932. We have only had 60% or so drops, so the nominal price of the market dropped much more from 1929 to 1932 than today and required a nearly 1000% gain to get back to the previous nominal price high.

      However, it is not as simple as that. On an inflation (deflation) adjusted total return basis, the DJIA had recovered 100% by 1937: http://www.bogleheads.org/forum/viewtopic.php?p=580545 and had two more total return peaks higher than the 1929 peak by 1954.

      That is difficult to do today as our dividend yields ar much lower than in the 1930s, so much of the total return has to come from price appreciation. We have become so accustomed to low dividend yeilds that only people looking for income have really focused on their importance. As a result we have not recouped the inflation total return peak that we had in 2000 yet.

      • 89% and 57% . . .

      • MarketStudent says:

        Using SPY as a proxy for the the S&P 500 index, the data I have shows that on a dividend adjusted basis, we reached a new peak in Aug. 2012. You are correct that in real terms, the 2000 high has not been exceeded. If the 1954 and 1995 analog holds and stocks continue their robust move up, however, it could be possible for new inflation adjusted highs to ensue and exceed the 2000 high.

  6. mpappa says:

    Its 1998. Markets are primed to rally to frothy highs but I don’t quite see obamian deficits falling in a clintonesque way that was the real fuel for that epic rally. We have a fed we can’t believe since they overcompensate on both ends all the time. Pray Volker is still around when we need him. I don’t see a soft landing post qe.

  7. VennData says:

    “…I don’t see the current Congressional and Administration leadership as up to the task…”

    This administration has already turned things around. If you get the GOP out of the way we would be doing much better. you know the GOp that can’t even support UN GUIDELINES that RECOMMEND how to implement help for handicapped folks that we ALREADY HAVE!

    Obama’s tax hikes have already cut the deficit. Growth continues. job growth continues. Foreigners are swamping our shores, the problem is trying to get the GOP to allow immigration go through to allow even more.

    GOP voter, take a decade off, rage at your fist and we’ll have everything fine when you get back from the cracker barrel

  8. phillips49 says:

    Fear and greed are the only constants here. The other inter-related conditions of this market are un-precedented and it cannot be examined in the context of market history. Every day is a new day.

  9. Scary story: Why 2013 looks like 1987

    All hail the bull market, which ended the week with a big rally. But it also is starting to look a little like 1987, which suffered an epic blow-out.

  10. Gonzop says:

    if market set ups were to repeat – a probabilistic miracle given the so many factors – you wish we’d learn from history and past mistakes but even then, given a set of say, 30 identical factors, you’d hear that it is ‘different’ for humans need to adapt whatever facts to what they want in such case, higher markets

    germane factors to consider for investing over an ultra long timeframe are demographics and migrations

    demographics for example will tell you that Japan is doomed no matter what king kong Abe brings forth – a shrinking population and reluctance to open your borders to immigrant is a very bad thing

    same trend is ageing is now being observed in Portugal and Spain also plagued by a monster emigration of their young, most brilliant minds to greener pastures. Those countries are done.

    self fulfilling mantras may work on equity markets for a while, until they don’t. Markets always anticipate economic cycles by 9 months or so they say, well it is a different ball game now isn’t it, they want stubborly higher while ignoring a slowdown in world economy (train freight, cargo, commodities)

    higher risk assets will never boost an economy if they are concentrated in too few hands. Someone wrote that it took a full generation to come back to equities after the great depression, why would you expect people who got slaughtered in 2008 (if not in 2000) to come back a few years later only?

  11. Alex says:

    What is different this time is profitability. Corporations are really profitable right now. If it persists, then it’s 1982, let the good times roll. If not, then stocks go down.

    The way it’s supposed to work is that when a company gets really profitable, it attracts competition, and profits get harder to come by. One other thing that is different this time is far more aggressive protection of intellectual property, including IP where the “owner” only has a very questionable claim. The new notion of IP, where companies can own genes, mathematical formulae, and the color of a particular pill, may be what we look back on as the defining driver of wealth creation and movement in this decade.

    I compare the fight over IP to the social class wars – I think overall, big companies are better off under the old IP regime, where new ideas came out of small shops and big companies made most of the money, one way or another. But I think some of these big (old) companies think its most important to cling to what they have, rather than embrace what is new, and they like the idea of building up a wall, or moat, of patents and copyrights. In the same way, plutocrats who refuse to learn from history think the wealthiest class can just get richer and richer, and poorer people can be left to find their way somehow. It has never worked, and it won’t work in the corporate world, either.

    I hope we get a more rational approach to IP in the next few years, but if we do, I think the intermediate term outlook for the stockmarket will be negative, as profit margins, especially of some of the biggest firms, shrink

  12. [...] Today’s market context does not show up in the history books.  (Big Picture) [...]

  13. nofoulsontheplayground says:

    I too have been having a hard time “rhyming” this era with prior ones. The best recent match was the Nasdaq circa 1999-2002 and the Dow 1929-1932. That was a moving mirror image. The 1966-1982 Dow was a good fractal for the S&P 500 from 2000 on until QE.

    One aspect of the prior eras we may be overlooking now is the large portion of the US economy that was tied to manufacturing back then. With a high percentage of GDP from manufacturing, there were more inventory adjustment recessions in the past. Furthermore, with the current FIRE economy (Finance, Insurance, Real Estate) we have only really had inventory adjustment/restructuring in the Real Estate/housing portion of the acronym since the 2008-2009 recession.

    It could be argued that until we see significant restructuring in the fields of finance and insurance in the US, we will not truly be through with the secular bear market begun in 2000.

    In the meantime, the trend is your friend. Ride the cyclical bull.

  14. Frilton Miedman says:

    “The answer is none of the above.”

    Emphatic agreement.

    Someone above compared us to the 1970′s, in the 70′s a stock with a P/E of 10 was frothy while inflation was upwards of 3%.

    Now, we have inflation at +/-1.5%, this is why I argued against the notion that the SPX needs to see a P/E of 10 before we resume a cyclical bull.

    70% of our economy hinges on consumer buying power, although wage growth is dismal, millions of homeowners have refi’d mortgages at rates as low as 3%.

  15. Kopin Tan says:

    Nostalgia fans have plenty to choose from lately, what with 2013 unfolding in ways that smack of both the 1980s and the 1990s. Economic growth averaged just under 4% a year through both of those expansionary decades, but defensive sectors led in seven of the 10 years from 1982 through 1991. Then the 1980s’ big hair and loud colors gave way to antifashion and grunge, and cyclical stocks led in six of the next eight years.

    With defensive stocks propelling this year’s rally and the Nikkei levitating anew, investors can be forgiven for feeling it’s the ’80s all over again

  16. Willy2 says:

    My market context is the 1920s and the 1930s. Events unfolding from 2000 up to 2007/2008 were strikingly similar with what happened in the 1920s (e.g. Housing bubble). Market developments from 2009 up to now were also strikingly similar to what happened with the timeframe from 1930 up to 1931/1932.

    I look at a number of indicators/ratios and these are all, one after another, showing negative divergencies with e.g. the DOW & S&P.

    Central banks are powerless in the situation that’s about “to hit us over the head”. Actually, central bankers have made things MUCH, MUCH, MUCH worse. The deflationary bust up ahead will therefore be MUCH worse as well !!!

  17. Two other options not mentioned above: 1937, and late 1940s. 1937 is an obvious parallel given that the 2008 crisis was equivalent to 1929 in terms of credit deflation, and that the current recovery is both weak and incomplete, yet there is pressure to straighten out some of the policy imbalances that were applied to halt the panic. The late 1940s also makes a bit of sense, given the huge debt overhang, suppressed interest rates, a huge housing price and other forms of inflation, and the economic decimation worldwide leaving the U.S. as the “cleanest dirty shirt”.

  18. 4whatitsworth says:

    I see this as a simple exercise in supply and demand that could contimue for some time. There is a huge supply of cash with mediocre demand for it. Today most people with cash positions are investors or looking to retire and searching for income producing assets. There is a limited supply of these income producing assets like stocks so the price goes up. There is also an abundance of non or low income producing assets and a reduced demand so prices go down. Now how to get the demand up for non-investment type assets is anyone’s guess and governments all over the world are trying to get people to forget about the past and the future and live for today.

  19. [...] Ritholtz’s fine post this morning, What is Your Market Context?, takes a look at how our various frames of reference impact what we see and expect in the [...]

  20. McCabe says:

    From Fleck’s site below. Yes, it’s JUST like 1999…except in May of 1999 CSCO was trading at 187X FY-99 earnings* and is now at 11.9X FY-13 consensus with a 2.8% dividend.

    They made $0.62 in the year ended 7/99 and in late May 1999 were trading ~$116.
    “Stuff” Like It’s 1999

    Last night JGBs behaved themselves and rallied a bit more, as did most debt markets. Meanwhile, equity markets were pretty much a nonevent. Nonetheless, stocks were strong here despite rather ugly macro data, as the market was led higher by the Nasdaq, which was powered by Cisco’s “manufactured” success at the game of beat-the-number. In a maneuver from the 1999 tech mania playbook, DSOs (days sales outstanding) exploded 25% on a revenue gain of just 5%. Thus, they made the revenue estimate. Despite what nearly every other tech company has reported and said, Johnny C. was poetic about how great business is (or will soon be).

    Just a Bit of Channel Surfing The market responded to the hype and CSCO actually gained about 14%. Of course, if Cisco can do that, any tech stock can do whatever it wants. Given the action in most names, and certainly those with significant short interest (e.g., Tesla), this just demonstrates how absolutely impossible short selling has been in this money-printing environment. Having said all that, Cisco is almost certain to “miss” this quarter, and may be a tempting tactical short sale target about 85 days from now.

    In any case, the early rally fizzled and the market closed slightly lower. Away from stocks, bonds bounced, as did oil, while green paper was slightly weaker. Overnight the metals were pummeled again, as gold dropped 2% while silver slid 3%, but in New York trading silver erased its losses to close 0.5% higher, while gold trimmed its to a small fraction. Similarly, the miners were slaughtered initially, but they closed mixed — some lower, some higher.

    If They’re Hedging, They’re Doing It Wrong While on the subject of gold and the miners, many of the folks who hate gold (which seems to be the vast majority of the population) are constantly opining on subjects that they know nothing about. One of the refrains I have seen lately is that, “pretty soon the miners will be hedging.” Those folks might be interested to know that last night New Gold announced that it had lifted a hedge it had inherited from a prior acquisition. Of course, those who love to wax negatively about gold will not note that fact, as it is not convenient to their thesis.

  21. neddyj says:

    If the Fed has never done QE to this extent before (or even close to it) – comparing to other years and the PE ratios and inflation levels are pointless IMHO. The chart may look similar, but the underpinnings of a market are like fingerprints – all different, right? So if it’s like 73-74 or 1995 or 1998 – none of that will matter when the Fed finally changes course. Sure, 1982 began a ginormous bull run that lasted a very long time – but how many billions of dollars of treasuries a month was the Fed buying to keep the economy from slipping into a recession at that point? Where were interest rates? Where was inflation?

    “That is, until ZIRP and QE1-4 began. An FOMC engineered 145% rally off of the lows at a 0% Federal Funds rate is simply a case of first impression. There are no historical analogies to the current circumstances. The Fed action has shifted the context debate into a new dimension.”

    Barry – aren’t the words “it’s different this time” always uttered as a defense for predicting higher prices after prices have already risen sharply? (Maybe I’m wrong, but I don’t recall hearing them from someone talking about how much further down the market has to go…) People begin asking “how much higher can it go?” or they actually start looking at economic data or they see that as hard as the Fed is trying to cause inflation, it’s really only taken hold in equity prices – and so those who want/need/have a vested interest in still higher prices in the market begin to use that phrase as part of their explanation.

    “The Fed action has shifted the context debate into a new dimension” – I totally agree with this statement. It gives me both hope that they’ve built a better mousetrap…and fear that they’ve just built a very dangerous science project that may have all sorts of unknown side effects.

  22. According to the Balenthiran Cycle 2013 is the equivalent to 1942 or 1978 i.e. the third great drop of the ongoing 17.6 year secular bear market. Using this cycle going back over 100 years on the Dow, I anticipate a top about now and a drop into fall 2013. 1942 is my preferred scenario as i believe we are headed into a Kondratieff spring after 2018.

    A diagram of the cycle is shown here (see for yourself and count back, you’ll be pleasantly surprised).




  23. [...] Ritholtz recently examined how our various frames of reference impact what we see and expect in the markets. More [...]