'it's Not 1929 Again': Statistical Evidence We Are Not Heading For A Bear Market

[interestrateripoff]

http://www.telegraph.co.uk/finance/personalfinance/investing/12031954/Its-not-1929-again-statistical-evidence-we-are-NOT-heading-for-a-bear-market.html

Are investors sleepwalking into another stock market crash? After a spectacular recovery in share prices since the lows of the financial crisis, many feel that the only way is down.

America’s main stock market index, the S&P 500, has risen by a huge 183pc since March 2009.

While gains in Britain have been more modest, the FTSE 100 index has still risen by 67pc over the same period, while the broader FTSE All Share index has gained 96pc.

- More charts can be found here

More worryingly, some measures of stock market value, such as the “p/e” and “Cape” ratios, suggest that American shares are significantly overvalued. Unfortunately, any fall on Wall Street would be almost certain to spread to other markets such as London, even if shares here seem more reasonably valued.

So is a market accident around the corner? In a bid to understand what causes markets to crash, analysts at JP Morgan Asset Management looked back at America’s 10 most extreme bear markets since the great Wall Street crash of 1929.

It analysed the characteristics of each crisis, concluding that there were four main ingredients that usually had a big hand in sending America’s stock market into meltdown. Typically there would then be “contagion” to other global markets, including Britain’s.

Of these four ingredients, the most common was economic recession, which was present in eight of the 10 bear markets analysed (see table, below).

The exceptions were the “flash crash” of 1962 and the “program trade crash” of 1987, which seemed to be triggered by extreme valuations of US shares.

Statistics are used much like a drunk uses a lamppost: for support, not illumination.

[crashmonitor]

Well taking the four factors for today.........

(1) Recession...well not yet, tbh the local economy seems to be the hottest in my lifetime, jobs are two a penny and the whole of Europe is queuing up to get in on the action and we have the fastest growth of any developed country.

I know something is up when you can't get a trades person for love nor money, skips are on every drive and the roads and pavements are clogged with cars and people from all over the world. Recession ?

(2) Commodity spike ?..........

(3) Raising of Fed rates ?..Yes to the second lowest in the history of mankind.

(4) Equities over priced ?...At a time when we have the greatest dislocation of yield between bonds and equities (bonds being the richly priced one) in the history of mankind. and looking at UK equities the only asset class in the world still priced at 20th century prices and at a 15% discount to boot after 16 years of inflation and other asset classes tripling. Quadruple

Sure we have got an elephant in the room in public sector debt (private sector has deleveraged 20% since 2007) may be that is what we should be worrying about and the Bonds that prop up the public sector largesse.

Edited December 7, 2015 by crashmonitor

[Killer Bunny]

What an idiot. Of course it/s not. It's 2015.

But to say we are not headed for a bear mkt is plain silly.

We might even be in it already, since the Spring of this year. Lower highs, until no longer.

[crashmonitor]

What an idiot. Of course it/s not. It's 2015.

But to say we are not headed for a bear mkt is plain silly.

We might even be in it already, since the Spring of this year. Lower highs, until no longer.

Sure we are headed for a big Bear may be before this decade is out. In the meantime consumers are getting drunk on cheap oil and finally releveraging their debts after eight years of consolidation on zero interest rates.

The crash will come when we get the hangover from this party, but not whilst the party has just got started.

[R K]

Recession? Nope.

Commodity shock? Nope.

Inverted yield curve? Nope.

Extreme valuations? Nope.

You would have to be an idiot to claim a bear market started in May 2015.

[frederico]

Err nobody seems to mention debt.

Anyone can have fun using a credit card up to a point, of course countries never go bust, especially those that can print their own money... Oh hang on

[crashmonitor]

Err nobody seems to mention debt.

Anyone can have fun using a credit card up to a point, of course countries never go bust, especially those that can print their own money... Oh hang on

I'd agree with you on public sector debt and Greece shows what happens when the can no longer be kicked. A 20% deleveraging in private sector debt since 2007 whence debt has been almost stationary says that is not the problem yet.

We may get problems down the road now that releveraging has started.

[R K]

Well, I maintain an open mind as to whether that was the start month. Certainly that is the month all my stock picking models (4 different models comprising 78 US stocks in total, all over $1 billion in cap) uniformly began to break down. Small cap and equal weight and higher beta stocks have all underperformed since, along with general breadth and junk and emerging markets, global trade.

Of course this could all be to do with lower commodity prices and that the positive effects have yet to be fully felt.

EDIT:

I think you're wrong on valuations on sections of the market (like the techbubble, that is all it needs). I know you read this but for others, this is quite a good blog. Very prescient call in June this year, worth looking up the back copy:

http://www.intelligentvalue.com/2015-value-alerts/151206.htm

I didnt mention valuations on "sections of the market". Is the SPX in a bear market? No. have oil sector issues/bonds been hammered? Sure. So what.

If someone claims a bull market only starts when a new high has been hit then they must conclude SPX bull market didnt start until April 2013. Link to price breakout in April 2013:

http://stockcharts.com/h-sc/ui?s=%24SPX&p=W&st=2007-01-07&en=(today)&id=p01577227733

I have no idea why same people claim it ended in May or June 2015 but even by their own bizarre logic that would be an abnormally brief bull market. Same people said bear market started in 2011 too (even though they also claim it didnt start until 2013) These are the people to ignore (imo).

As for unpredictable shocks, well yeah, of course. But since theyre not predictable the past is no guide and no-one can claim to foresee them.

Edited December 7, 2015 by R K

[crashmonitor]

Well, I maintain an open mind as to whether that was the start month. Certainly that is the month all my stock picking models (4 different models comprising 78 US stocks in total, all over $1 billion in cap) uniformly began to break down. Small cap and equal weight and higher beta stocks have all underperformed since, along with general breadth and junk and emerging markets, global trade.

Of course this could all be to do with lower commodity prices and that the positive effects have yet to be fully felt.

EDIT:

I think you're wrong on valuations on sections of the market (like the techbubble, that is all it needs). I know you read this but for others, this is quite a good blog. Very prescient call in June this year, worth looking up the back copy:

http://www.intelligentvalue.com/2015-value-alerts/151206.htm

Yep not really been factoring in the positive gains of giveaway oil prices. The UK consumer is getting drunk now on cheap oil (after years of being shafted by the despots in the Middle East) and there should be some benefit to non commodity corporates. Indeed if you had wiped out all commodity shares to zero then the FTSE 100 would be about where it is today if other FTSE components had held, which they haven't.

[crashmonitor]

Well, the sections of overvaluation include the russell and the mega stocks leading the spx and energy/commodity of course. A similar issue occurred during the tech bubble where an awful lot of capital (equity and debt) flowed towards exciting new tech issues and away from 'boring' companies making profits and paying dividends. The multiple on the latter wasn't out of kilter whatsoever - in fact they were being pushed down by being unfashionable. The sheer amount of capital that has flowed to some of the sections of the market has caused an unprecedented supply glut and price compression. That capital will now be wiped out. It really depends on the scale of this as to whether it has a similar effect but my point is that 'sections' of the market if a big enough issue of course can affect the entire market.

The main weight of money has chased up bond prices or indeed sat on the sidelines in multi- trillion dollar hoards by the fearful (look no further than the hoards of cash held by HPC members). The world is awash with cash but it certainly hasn't found its way into UK equity at least (may be some case with the S and P)

If indeed equity is overpriced then it is absolute because comparatively it is the cheapest asset class left on the planet with reference to yield.

[R K]

Well, the sections of overvaluation include the russell and the mega stocks leading the spx and energy/commodity of course. A similar issue occurred during the tech bubble where an awful lot of capital (equity and debt) flowed towards exciting new tech issues and away from 'boring' companies making profits and paying dividends. The multiple on the latter wasn't out of kilter whatsoever - in fact they were being pushed down by being unfashionable. The sheer amount of capital that has flowed to some of the sections of the market has caused an unprecedented supply glut and price compression. That capital will now be wiped out. It really depends on the scale of this as to whether it has a similar effect but my point is that 'sections' of the market if a big enough issue of course can affect the entire market.

Sure. Back to OP:- We will see new highs SPX in Q1 (latest Q2).

You havent made the case (for me) Im afraid for 1. recession now 2. commodity price shock 3. yield inversion 4. Extreme (SPX overall) valuation

[zugzwang]

The main weight of money has chased up bond prices or indeed sat on the sidelines in multi- trillion dollar hoards by the fearful (look no further than the hoards of cash held by HPC members). The world is awash with cash but it certainly hasn't found its way into UK equity at least (may be some case with the S and P)

If indeed equity is overpriced then it is absolute because comparatively it is the cheapest asset class left on the planet with reference to yield.

Not strictly true. A year ago the FTSE was over 7000. There's been a significant correction since then because of the FTSE's relative exposure to commodities/miners. All of which was entirely predictable.

[crashmonitor]

Not strictly true. A year ago the FTSE was over 7000. There's been a significant correction since then because of the FTSE's relative exposure to commodities/miners. All of which was entirely predictable.

Over a sixteen year period Bonds, PMs and houses have all tripled, but UK Equity (at least the 80% of total market cap which makes up the FTSE 100) has fallen by 10% nominally and over 50% in real terms. UK Equity is the almost the exception to the rule of a global assets bubble.

Edit. I'm not including yield, but neither am I with UK property.

Edited December 7, 2015 by crashmonitor

[Killer Bunny]

Well, the sections of overvaluation include the russell and the mega stocks leading the spx and energy/commodity of course. A similar issue occurred during the tech bubble where an awful lot of capital (equity and debt) flowed towards exciting new tech issues and away from 'boring' companies making profits and paying dividends. The multiple on the latter wasn't out of kilter whatsoever - in fact they were being pushed down by being unfashionable. The sheer amount of capital that has flowed to some of the sections of the market has caused an unprecedented supply glut and price compression. That capital will now be wiped out. It really depends on the scale of this as to whether it has a similar effect but my point is that 'sections' of the market if a big enough issue of course can affect the entire market.

Transports are ugly. Russell not leading. Semis not leading.

Unless and until mkts make new highs caution is the operative word. Monthy MACD S&P is as bad as 2000 and 2008.

[anonguest]

Over a sixteen year period Bonds, PMs and houses have all tripled, but UK Equity (at least the 80% of total market cap which makes up the FTSE 100) has fallen by 10% nominally and over 50% in real terms. UK Equity is the almost the exception to the rule of a global assets bubble.

Edit. I'm not including yield, but neither am I with UK property.

I have noticed this too. Perhaps, though, this aversion by 'big money' to invest in UK equities despite superficially appealing factors (e.g. good dividend yield, etc) is a de facto vote of no/low confidence in the longer term outlook for UK plc ????

Edited December 7, 2015 by anonguest

[zugzwang]

Bull market? US population-adjusted new home sales are about level with the bottom of the early 80s double-dip recession and 51% below where they were in 1963!

http://www.advisorperspectives.com/dshort/updates/New-Home-Sales

[anonguest]

Bull market? US population-adjusted new home sales are about level with the bottom of the early 80s double-dip recession and 51% below where they were in 1963!

http://www.advisorperspectives.com/dshort/updates/New-Home-Sales

I wonder what the equivalent graph for the UK looks like?