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A Historical Perspective for Today’s Market

Friday, January 30, 2015

– by Sheila & Rich Jamison -

Fourteen of twenty trading days in January saw the Dow Jones Industrial Average (DJIA) move by triple digits. Volatility spiked as numerous events have influenced the markets. And we’ve just had two consecutive months ending in the red, the first time since early in 2012.

The Pundits Weigh In

As usual when markets dip, there are those who are quick to say the bull market run is over. (See the last InSights about this here.) Is it really? I’ve got good news, I’ve got better news and I’ve got bad news.

The Bad News

The bad news is simply that no one knows what’s in store for the market. Some newsletter authors would like you to think they know. They’re only deluding themselves if they believe that they do know. Unlike physical laws, where we still have only reasonable certainty (like a dropped pen falls down instead of up), the future for the financial market is unknowable.

The Good News

In the absence of information, we have two choices. The first is to make it up. See above for that approach. The other is to look to the past to see what has happened before. An important caveat here is that this still doesn’t provide any guarantee that it will happen again.

Dow Jones Industrial Index History
While the S&P 500 Index (begun in 1957) contains more stocks, the DJIA (begun in 1896) contains more history. Hence, more than twice as much time to examine for trend analysis. (The NASDAQ Composite contains even more stocks. But it wasn’t started until 1971.)

What Does It Look Like?

A long-term perspective of the Dow Jones Industrial Average (since inception in 1896) reveals the reality that there are extended periods of time in which the US equity market will trend generally upwards. It also shows lengthy periods of time where the market will instead stagnate or move generally lower. These lengthy periods are called secular bull and secular bear (sideways can be referred to as “fair”) markets.*

There have been eight such alternating cycles since 1896, with each averaging 14 years in duration. Here’s an overview of that time period.

Chart of the structural markets of the Dow Jones Industrial Average, May 1986 through December 2014

    Thanks to Dorsey Wright & Associates for permission to use the chart.

The Better News

The current bull cycle is only a little over four years old. If history plays out again, we’ve got quite a bit in front of us yet.

How Do Such Periods Affect Us?

Suppose we had accumulated enough wealth to begin investing around the age of 40. Further, we have life expectancies of about 85 years. Then we would likely experience about three of these cycles during our investment lifespan. A fourth cycle could be incorporated by pieces of full cycles at each end of that investment life. For ease of seeing the ramifications, let’s consider those who begin at/near the beginning of a cycle.

The biggest question, then, is will an individual see two bull markets and only one bear market, or will that individual be faced with two bear markets and only one bull market during their investment lifespan? Where an individual gets on the “investment train” can have a tremendous impact on portfolio returns overtime.

Is the Trick Being Born At the Right Time?

No, though that’s a ‘leg up’ on your investment life, it’s not quite that simple. Even an individual fortunate enough to see two bull markets needs a game plan to navigate a 14 year stretch of a bear market in the middle. For those born such that they experience pieces of cycles at both ends, sometimes these will be favorable and other times unfavorable. So no matter where you begin your investment lifespan, the moral is:

It is important to have at one’s disposal strategies that are effective in both generally rising (bull) markets and falling (bear, or “fair”) markets.

Think Supply and Demand

One methodology that has existed since the late-1800’s and been proven effective in both kinds of markets is that of the Point & Figure (P&F) methodology. The first proponent of the methodology was Charles Dow, the original editor of the Wall Street Journal and one of the creators of the DJIA.

Dow was a fundamentalist at heart, yet he appreciated the merits of recording price action and understanding the supply and demand relationship in any investment. P&F methodology has developed over the past 100+ years, but remains at its core a logical, organized means for recording the supply and demand relationship in any investment vehicle.

As both consumers and investors we are innately familiar with the forces of supply and demand. It is after all the first subject introduced in any ECONOMICS 101 class, and we experience its impact regularly in our daily lives. We know why tomatoes in the winter don’t often taste particularly good, don’t have as long a shelf life, and are paradoxically more expensive than those sent to market in July. What some investors are slow to accept is that the very same forces that cause price movement in the supermarket also trigger price movement in the financial markets.

When all is said and done in a free market of any kind:

  • If there are more buyers than sellers willing to sell, the price will move higher.

  • If there are more sellers than buyers willing to buy, the price must move lower.

  • If buying and selling are equal, the price will remain the same.

By charting this price action in an organized manner, we hope to ascertain who is winning that battle, sellers or buyers, supply or demand. By having the ability to evaluate changes in the market we have taken the first step toward also becoming responsive to both bullish and bearish periods.

Technically Speaking

Looking back at the recent stretches of structural bull and bear markets, there has been a clear theme reverberating within the technical asset class rankings we use. During the bull market of the 1990’s, US equities were the #1 ranked asset class 76% of the time while cash never managed to garner an overweight position. Meanwhile, during the bear market of the 2000’s, asset class ranking varied dramatically.

Case in point, US equities only managed to gain the #1 spot just 4% of the time in the 2000s. Quite a difference from the 1990s, right?

Looking back at the recent four year stretch from 2010 to 2014, we find that the current ranking potentially reflects or is at least characterized as that of a ‘bull market’. US equities have been ranked #1 for 89% of the past 4 years while cash and fixed income have failed to achieve a top ranking. Thus we have a bull market pattern today, based on the similarities to the most recent bull market during the 1990’s.

Only Time Will Tell

Granted, we know that history will ultimately be a judge of this characterization, but judging by the recent relative strength dynamics of today’s market to that of the 1990’s, we have ample evidence in support of this. We know asset classes rotate, and can remain in or out of favor for frustratingly long periods of time. Then we are driven to adhere to a form of investment analysis that is capable of changing when those key trends do … and staying with the new trends as long as they are in force.

Equities are a strong trend today, and perhaps will remain so for a long time to come. But we know that the only “normal” in this business is that such things change. Reading those changes and helping you manage them when they occur is why we’re here.

Want to talk about your portfolio. Give us a call. We always have time for you.

*Technically, the side-ways markets are often tied to bear markets as they begin with 20% drops. Shorter term trends that occur within secular markets but run counter to the long-term trend are called cyclical markets. Hopefully that helps clear up some of the CNBC-speak you may have heard.

Sources:
A History of Standard and Poor’s. Staff. Standardandpoors.com. retrieved January 31, 2015.
Dow Jones History. Staff. Dowjones.com. retrieved January 31, 2015.
Nasdaq Indexes & ETP Timeline. Staff. Nasdaqomx.com. retrieved January 31, 2015.
The Daily Equity Report. Editorial Staff. dorseywright.com. Retrieved January 29, 2015.

The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Interpretations of the data, views and/or opinions expressed are those of the Jamison Financial Group based on market and economic conditions as of the date of publication and are subject to change. They do not necessarily reflect the opinions of any other individual, group or organization.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities whenever mentioned are for illustrative purposes only and may not be relied upon as investment advice.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
The NASDAQ Composite is a market-weighted index of all the over-the-counter common stocks traded on the NASDAQ system.
The S&P 500® is a market-capitalization-weighted index of common stocks.
Past performance is no guarantee of future results.

© 2015 Jamison Financial Group. Please feel free to distribute copies to individuals you feel may benefit from the information presented. Commercial use is prohibited.