The word is about, there’s somethin’ evolving
Whatever may come, the world keeps revolving
They say the next big thing is here, that the revolution’s near
But to me it seems quite clear
That it’s all just a little bit of history repeating
– “History Repeating” – Propellerheads (featuring Shirley Bassey)1
We fear the stock market rally that started in June has now run its course. Looking strictly at the charts, the current market’s rally matches previous bear market rallies in terms of timeline and magnitude.
The chart below shows the monthly prices of the S&P 500 from 1998 to 2011. In both bear markets shown on the chart, there was an initial sell-off followed by a relief rally for two months (marked by the red arrows), before prices dropped to new lows.
Internet Bubble (2000 – 2003)
During the Internet bubble starting in 2000/2001, prices took seven months to bottom out before rallying 21% over the course of two months — only to dip to new lows afterwards. Back then, prices fell 41% over the next 17 months until finding a bottom in October 2002.
Great Financial Crisis (2007 – 2009)
In the great financial crisis of 2007 through 2009, prices fell for five months before rallying 14% over the next two months, only to go to new lows afterwards. Back then, prices fell 53% over the next 10 months until finding a bottom in March 2009.
Current 2022 Bear Market
This year, prices fell for six months and have rallied 19% over the last two months. If the market follows the pattern of the above-mentioned bear markets, the current rally is done, and prices will move on to new lows from here.
As I write this, the S&P recent high point was 4325. It currently stands at 4140. A target of 3400 would be a 21% drop and in line with previous bear markets. If prices move back above 4325, the entire thesis is invalidated.
Have Some Humility, Nostradamus
I’ve often poked fun at people who try to predict the future, joking that my 2022 predictions will be available on January 1st, 2023. In my opinion, predictions are nothing more than pure marketing.
It is our humility and experience — a gentle way of characterizing previous mistakes — that allow us to recognize both the possibility that prices could fall from here just as clearly as the possibility that prices could rise from here. Our prudent approach has been to increase the allocation to defined outcome ETFs in your portfolio, which is effectively a compromise.
Not matter what the market does (either on the upturn or downturn), the defined outcome ETFs are not expected to move as much as the market. In times of volatility, shrinking the range of possible outcomes seems like a prudent approach.
1 Great song! I love Shirley Bassey’s voice mixed with a more modern beat. She also sings a number of James Bond theme songs such as “Goldfinger,” “Diamonds Are Forever,” and “Moonraker.”
If you have any questions, please do not hesitate to contact your Impact Capital advisor.