S&P 500 - Could this be like 1987?
- Aug 8, 2017
- 2 min read
For many years I have used a model of economic cycles that was published by Joseph Schumpeter back in 1930. I have drawn a Roadmap of what the stock market index would do based on where we are in this model. It has a good but not perfect track record. There are different length cycles that inter act in a complex way. The first is an annual seasonal deviation (we all know to Sell in May and come back on Saint Ledger day). The next is a four year cycle called in the text books the Kitchin Wave. This has normally led to three good stock market years followed by one bad one around what many just call the business cycle. At present there is no evidence that this cycle is still working. You can't have an eight year bull move with a four year cycle. It is assumed that the longer cycles are still working and have not been crushed by QE and ZIRP like the four year one. The ten year cycle called the Juglar Wave has in the past been reliable. We will soon find out if it is working now. In a normal decade the first few years are neutral. Then in the third, fourth and fifth year a strong bull phase develops. If there is going to be a nasty set back it comes in the seventh year, and especially in the second half of the year. Last decade it worked in that the bear market started in the seventh year, though the worst of the bear was in 2008, and in the ninth year the decade ended with a rally which is normal. In 1987 there were strong similarities to the present. We were in the early stages of a secular uptrend that lasted from 1982 till 1999 and yet there was a sudden correction in 1987. The USA market is vulnerable because it is so expensive. Notice that the period from mid September to late October may not be a good time to be fully invested. Also note that we do not get much warning of trouble ahead. There is no economic event or geopolitical disaster, it is just the cog wheels of the market which can fall off all by themselves. Though this is a probability, not a certainty, the USA and U.K. Equity Markets are no longer the best performers in any case. They are not even beating a passive holding of the Global Equity index. We are taking more risk than we need to, and for less reward, and in addition there is this risk of a very substantial draw down against us. Better get out and live to fight another day.
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