I do think the ghosts of stock market corrections past are haunting us. Those who forget the lessons that history teaches us are predestined to repeat them. As an apprentice of U.S. stock market history, I’ve seen this maxim made true, time and time again. I believe I have seen the ghosts of the 1929, 1987, 2000 and 2008 U.S. Stock market crashes because they have materialized in 2013 and are appearing in front of everyone.
Advisors and the public should prepare their portfolios: the current stock market tops look and feel like they have the traits of all past market tops and the biggest four market crashes combined. Once again, the reason is too much credit and too much speculation turning the overcautious into the overzealous and investors acting irrationally. They are jumping into the financial market headfirst thinking they have missed something and not wanting to be the last to the party. More astonishingly, however, is the misplaced and the infectious idea that this time is different. But, unfortunately it isn’t any different this time than the last four times.
Some of the names have changed, but the scenarios are exactly the same.
Let’s make some comparisons: the 1929 U.S. stock market crash provides true bone chilling context for what is happening in the U.S. stock market now and what is to come. The Federal Reserve in 1929 was knee deep in quantitative easing which expanded the market supply and lowered interest rates via direct bond buying. Does that sound familiar? Fast forward to 2013; Fed Chairman Bernanke led the enthusiasm for avoiding the mistakes that created the Great Depression, but proceeded to follow the same playbook. This has led Bernanke and now Yellen directly to the conditions that created all the issues in 1929. Mainly continuing to lower interest rates via bond purchases. Now doesn’t that sound familiar?
On November 30, 2013, The Wall Street Journal wrote that the latest investor intelligence poll of investment newsletter writers put the percentage of bears at 14.4%, the lowest level since 1987 , which was at the start of my financial career. The most remarkable fact of all is to consider what followed the 1987 low bearish reading. It’s important for both investment professionals and the public to do because it wasn’t a pretty picture. We should also reflect on what happened after the 1929, 2000 and 2008 market peaks because they were some of the most devastating times in the marketplace. The point is that the peaks we have today in the 2013 U.S. stock market have all the same characteristics of those of previous time periods. The same themes were present in all of the last four U.S. stock market crashes.
The market cap to GDP is already past its 2007 peak and is approaching the 2000 extreme peak. The medium price revenue of the S&P 500 is now at historic highs and even eclipsing the 2000 bubble level. Yet, there are so many people still jumping into this U.S. stock market as if they are missing something or have been left behind? Another sign which just happened last week was Goldman Sachs slashed their fourth quarter 2013 GDP growth to a mere 1.3%. This is absolutely atrocious, but I think it will actually be less than 1%.
So, whether it’s the 1929 or 1987 or 2000 or 2008 U.S. stock market bubble tops, they all ended badly. It’s not a good story for anyone unless they are prepared for it. Today the mistakes of the past are now being repeated once more because just like in the past, the Federal Reserve is misguided in its justification that quantitative easing is working because stock prices are higher. It’s their only justification because there is nothing to indicate that the fundamentals are better. The U.S. economic fundamentals are weaker than they have ever been.
The earnings for corporations have actually gotten worse each quarter of 2013 and the fourth quarter looks no different… yet the stock market continues to peak. It seems to me that everyone is ignoring the evidence that the wealth effect isn’t working through quantitative easing. This means we will be leading into a market correction. So beware of the ghosts of stock market past crashes because they are warning us to have defensive portfolios.