SUMMARY. This month is the 25th anniversary of The Crash in 1987. We consider what we learnt back then, how it helps us today, and where the markets are poised right now.
This month is the 25th anniversary of The Crash in 1987. Though it looks like nothing more than blip on a long term chart, it was a chance for many to learn important lessons; few did. How can it shine a light on current events?
We learnt that you must never become complacent about stock market investment, and always keep close at hand tools to measure the regular bouts of fear and greed. Some are technical, some fundamental, some absolute, others relative. In addition, observing investor behaviour is vital, as is tracking where debt lies in scale, because that is often the greatest strand of instability. Last but not least you must be clear on whether we are in a secular, long term, bull or bear market, because knowing that is key to maximising long term profits, and minimising short term pain.
So what is the message of this motley tool box right now?
25 years ago the yield on gilts was 10%, and on equities a little over 3%. That ratio alone screamed ‘sell’ equities. Now the dividend yield is a touch better, but 10 year gilts yield just 1.5%. That might not scream ‘buy’ equities, but it should make you hesitate about bonds. Other than this relationship, the most important information is that we are in a secular bear market for equities – it was the opposite in 1987, which is why The Crash was merely a correction within a bigger, longer, upward trend.
Secular bear markets are very uncomfortable, but also very confusing. A lot of the time these “downtrends” are actually going sideways, albeit in a very wide range. This broadly sideways trend is littered by very sharp, but short term, rallies which suck in the unwary near their peak. This is where we believe we are now. There are no guarantees on this, but the evidence points in this direction, and when the facts change, we will change our mind.
With the stock market having edged up over the last few months, we turned to one of our favoured analysts, one who is more inclined to analyse than rant, and who considers a wide range of indicators. He calculates that these indicators at current levels have historically combined in this way only 0.5% of the time, and the prior occasions were like a Who’s Who of awful times to invest.
And therein lies the opportunity. The most awful times to invest in the stock market are rapidly followed by the best times to invest! Bring it on.