Recent intra-day volatility is staggering. Swings on the FTSE 100 of several hundred points within a few hours are a regular occurrence. Forecasting future price shifts in such trading conditions is virtually impossible. There are no short-term historical patterns to guide me.
All I can do is rely upon my wits and subjective judgments.
But two events occurred this week that I view as positive omens. One was Wednesday’s eye-popping 8 per cent gain.
A scroll through my database found eight other king-sized daily advances since 1935 when daily records were first collected in the UK. Seven occurred during bull markets.
The other event that caught my eye was last Monday’s huge intra-day decline. It temporarily dragged the Footsie down 46 per cent below its June 2007 peak before prices rebounded later in the day.
This 46 per cent figure has important historical significance. Many investors compare current economic conditions with those in the Great Depression.
For reference purposes, the UK stock market fell 60 per cent during that downturn. In other words, even if current economic troubles rival those of the Great Depression, history suggests that much of the pain has already been dished out to investors.
My own feeling is that current conditions are not comparable to the Great Depression. We are in a recession, pure and simple. Time will tell if it is more painful or longer than normal, or if media hype is overdone.
Either way, the end of the world is not approaching. I do not believe the economy will weaken as much as it did seven decades ago and neither will share prices.
History provides another perspective worth thinking about. Major UK stock market declines in the last century of 50 per cent or more were usually associated with traumatic events like depression or threats to the survival of our way of life.
These include external threats, such as war, as well as internal crises.
The 1970s provides a good example of an internal crisis. Stagflation and recession hit all western economies hard. Shares fell around 45 per cent in New York and Tokyo. But the UK also had to contend with painful local pressures including excessive union power and government antagonism toward wealth. Investors feared these destructive forces were creating serious long-term damage and our stock market fell by 73 per cent.
Triggers for the current downturn are clear enough: falling house prices, financial industry excesses and recession fears. But comparisons with the 1930s and 1970s are a bit too far-fetched for my taste.
Corporate earnings are another riveting point for me. Analysts worry that the current recession will pull corporate earnings down sharply.
But a number of companies that I regularly follow appear to be sailing through current economic turmoil with little ill effect.
Two of the small companies on my watch list, Tribal Group and Alumasc, just issued positive trading updates. In fact, Alumasc sees marked differences between its own positive performance and “the intense financial troubles which surround us”.
I do not know if the experts are too pessimistic or if my own little corner of the stock market universe is sheltered from broad economic shifts. Either way, it is further evidence that the end of the world is not in sight, despite recent gloomy headlines.
From my vantage point, there is a good chance that much of the pain suggested by today’s screaming headlines is already reflected in current prices. The main remaining problem to contend with is investor panic and fear.
As Mark Twain once observed, investors now worry about the return of capital, not the return on capital.
Putting it all together, I suspect that conditions are ripe for a reversal of the downtrend. I do not yet know if Wednesday’s powerful gain was the start of the up-leg. But if a rally has not yet started, I expect it will soon do so.
The main issue I can not yet resolve is the likely longevity of the upcoming rally. It might be the start of a lengthy bull market or just a temporary respite from recent pain.
Either way, I look for a multi-week or multi-month rally.
If I am right, the rally will have two distinct waves. Many investors will initially keep to the sidelines, thinking the advance is merely a short-term, dead cat bounce.
They will ignore the important fact that stock markets and broad economic trends do not always march hand in hand. Rallies often occur when the news is grim.
But continued price gains will cause some sideline sitters to jump into shares. I call it the “train leaving the station” syndrome. It will create a second buying wave. Those who base their investment decisions solely on the current health of the economy will miss the rally.
Stock market historian David Schwartz is an active short-term trader. Send any comments or suggestions to firstname.lastname@example.org
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