The picture below is from the JP Morgan research report, which records ten major bull and bears in history. The picture may not be particularly clear, let's sort it out one by one:
1929 Great Depression
This is the largest bear market in US history. After the stock market peaked in 1929, it will take 26 years to continue to set new highs. This Great Depression comes from two reasons: excessive valuation and economic recession. Before the 29-year Great Depression, the U.S. stock market experienced a 37-month bull market, with the stock market rising 152%. The bull market started in July 1926. Among countless historical books, we all see that the Great Depression, which started in September 1929, was the most tragic day in the history of the US economy and stocks. So much so that there are countless textbooks about the Great Depression, including Dario in "The Debt Crisis", which specifically mentioned the triggers of this Great Depression, and the final restoration of the Great Depression came from Roosevelt's New Deal. This bear market lasted for 32 months, with the stock market falling 86%. But the subsequent oscillation and trimming took longer.
Triggers: economic recession, excessive valuation
1937 Fed tightening
This time the Fed tightening brought about a bear market comparable to the Great Depression in 1929. I even think it was the second decline caused by the Great Depression in 1929. At that time, the market began to bottom out and rebound in March 1935, and the bull market lasted for 23 months, and the stock market rose 129%. By March 1937, the market began to adjust again, and the stock market fell by 60%, and the bear market lasted 61 months. The reason for this bear market is the recession and the premature tightening of the Federal Reserve. We see that from 1929 to 1942, the US economy was in a major recession, and the bear market lasted more than the bull market. But this situation will never be seen again in the future. After this bear market, a group of "super investors" began to enter the market, including , Buffett, , Shelby. Davis et al.
Triggers: economic recession, Federal Reserve tightening
Plunge after World War II
We find it interesting. At the beginning of World War II, the United States was actually a bull market. In April 1942, US stock started a 49-month bull market, and the stock market rose 158%. The United States is actually one of the few countries that truly benefited from World War II. Because it is located between the Pacific and Atlantic Oceans, its local area has suffered almost no damage. However, at that time, Germany, the economic powerhouse, had turned into ruins. In March 1946, after the end of World War II, the United States started its third bear market in history. The triggers of bear markets also come from recessions and excessive valuations. It is very similar to the Great Depression in 1929. But the bear market fell by only 30% and lasted for 36 months.
Triggers: economic recession, excessive valuation
1962 flash crash
Starting from October 1960, the US stock market started another bull market. The index rose 39%, and the bull market lasted for 13 months. In 1962, the Cuban missile crisis occurred, and the stock market fell 28%, and the bear market lasted only for six months. At that time, US President Kennedy had a tough attitude, but his military strength was far stronger than that of the Soviet Union at that time. Of course, excessive valuation has also become a trigger for market adjustments. However, the stock market has undergone a brief adjustment and has begun to enter a beautiful 50 bull market.
Trigger factor: overvalued
1970 technology stock adjustment
In fact, the performance of US stocks in the entire 1970 was not very good. Let’s start with a bull market in 1962. Although the index rose by only 103%, the bull market lasted for 73 months and was a long-lasting prosperous era in American history. By November 1968, the economy began to fall into recession again, and the Federal Reserve continued to raise interest rates and tighten liquidity. Although the valuation was not particularly outrageous at that time, the market still began to turn bearish. The entire bear market was adjusted by 36%, lasting 17 months.
Triggers: economic recession, inflation, excessive valuation
1973 stagflation
1973 this time was relatively famous, and the so-called beautiful 50 also showed a significant adjustment at that time. First of all, we saw another bull market started in May 1970, lasting 31 months and the index rose by 74%. By January 1973, due to the economic stagflation, the economy did not grow while crude oil prices were high. The stock market began to enter a bear market.That history of stagflation has also been written in many economic textbooks. The bear market lasted for 20 months, with the stock price falling by 48%. During this round of plunge, Munger was seriously injured, with a drop of more than 30% per year for two consecutive years!
Trigger: Recession, Inflation
1980's Walker's tightening
I once said that former Federal Reserve Chairman Greenspan grew up with the golden key in his arms. His ex, Volker, was not so lucky. I encountered a crude oil crisis as soon as I started. In the entire 1980s, crude oil companies were the best companies at that time. Since November 1980, Volker has continuously suppressed inflation and raised interest rates. The entire bear market has gone through 20 months and the market has adjusted by 27%. But this also laid the foundation for the subsequent 30-year prosperity of Reagan Economics, the U.S. stock market and the economy. Therefore, the big bull market in the United States after the 1980s is thankful to Volker for his contribution!
Triggers: Recession, inflation, overvalued
1987 Black Monday
The bull market started in August 1982 for 60 months, with an astonishing 229%. In the previous reading of "The Meat of Wall Street", this history was also explained in a very detailed way. While the entire market is still immersed in the joy of the bull market, the daily decline of Black Monday in 1987 exceeded 20%, and a large number of stocks fell by more than 50%. The entire brokerage trading room stopped answering the phone until the end. However, from the perspective of the adjustment cycle, Black Monday in 1987 lasted for only three months, with a market adjustment of 34%. In fact, this can be seen as the relay of the adjustment of the biggest bull market from the 1980s to 2000.
Trigger: The valuation is too high
The Internet bubble collapsed in 2000
The bull market started in October 1990 lasted for 113 months, with the index rising 417%. It is the longest bull market in American history to date. President Clinton, who was elected in 1992, was the first president to take office since the Cold War. As soon as we came to power, we vigorously developed economic and technological innovation. The entire Internet is through hardware chips, routers, and then to software operating systems, Internet social and search engines. It can be said that everyone thinks that the stock price has escaped gravity. In March 2000, the Internet stock bubble collapsed, , Microsoft, was ruled to monopolize, and the American online snake swallowed the elephant and ate the century-old store Time Warner. Then came WorldCom's financial fraud and MCI's collapse. The entire bear market lasted for 30 months, with the index falling 49%. A large number of technet stocks fell by more than 90%. The trigger for this bear market is overvalued and economic recession.
Triggers: economic recession, excessive valuation
2008 financial crisis
After the market bottomed out in October 2002, the US stock market started another bull market that lasted 60 months and had an index increase of 101%. That bull market came from the leverage of the residents' sector, which directly led to the subsequent financial crisis. Starting from October 2007, from the collapse of Bear Stearns to the final redemption of Goldman Sachs. The entire bear market lasted for 17 months, with the index falling by more than 57%. This bear market decline was the largest since 1937. Therefore, it is also unforgettable by everyone. I won’t explain much about this bear market, there are a large number of books on the market. Those who are interested can take a look at Big But Not Falling and On the Break. This bear market, many hedge funds lost all their money, and some John, who made the greatest deal. Paulson . After this bear market, the second longest bull market in American history began.
Triggers: Recession, inflation, and overvalued
Four major factors triggered by bear market
We see that in this report, there are four major factors triggered by bear market: economic recession, inflation, tightening of the Federal Reserve, and overvalued valuation. Among them, the main factor behind the stock market's bearishness is the economic recession. We see that after World War II, the US economy has truly recessioned 11 times in total. Most of them were concentrated before the 1980s, especially after World War II to mid-1961, with four recessions. After entering the 1980s, except for the 2008 financial crisis, there were some minor recessions. Including the recession caused by the crude oil crisis in the early 1980s, and the small recession caused by Iraq's invasion of Kuwait in the early 1990s. In terms of the duration, the US economic recession lasted for more than one year after World War II: stagflation from 1973 to 1975, and the financial crisis from 2007 to 2009.
So will the current US stock market enter a bear market? Let’s look at the last four factors: inflation, tightening of the Federal Reserve and overvalued valuation. We continue to use the pictures in the JP Morgan report to tell you the current situation.
Below is the valuation level of the S&P 500 as of the second quarter of 2019, currently at 16.4 times, at the historical average. So is the valuation expensive? Obviously not.
What level is inflation? As of February 2019, the core inflation level was 2.1%, significantly lower than the historical average of 4% inflation in the past 50 years.
Will the Fed tighten? Obviously not. Even Howard. Max even "despises" Fed Chairman Powell, believing that he was kidnapped by Trump . But in any case, the United States seems to have entered the channel for interest rate cuts again.
So from the four factors that trigger a bear market, we can basically rule out stock market adjustments caused by the three major factors of valuation, Federal Reserve tightening, and inflation. The uncertainty now comes from whether the economy is in recession. Let’s look at the picture below. As of the second quarter of 2019, the US economy has expanded for 117 months, almost 10 years. It will soon become the longest cycle of economic expansion in US history. Based on the "pendulum theory", the economy cannot expand forever. The average expansion cycle of the U.S. economy is 48 months.
So what is the conclusion? Should the US stock market turn bearish or not? We don't make too much judgment. But judging from the 10 bear markets in history, each time it cannot escape the four major factors of economic recession, valuation bubble, inflation and liquidity tightening. At present, the latter three factors are unlikely to occur, and the recession does not seem to be seen in the short term.
Judging from this review, the risks of the US stock market are not very high. There are no factors that can trigger the bear market in the US stock market this year, and of course, short-term adjustments in the market may occur at any time.
This article is from Dianshi Zhuang
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