Doomsday prophecies haunt financial markets
SOON it will be October and the month can make any stock investor sweat. Well-known is the 1929 meltdown on Wall Street that started on Thursday, October 24, and reached its zenith the following Tuesday, October 29.
My first professional experience with a stock market crash was in 1987. On “Black Monday,” October 19, the Dow Jones stock index famously dropped 22.61 percent. Very interestingly, the second-largest single-day drop ever in the Dow, which was on March 16, 2020, with a loss of 12.93 percent, can be attributed to the Covid-19 pandemic. For the sake of completeness, back in 1929, the total loss on the 28th and 29th of October was 24.55 percent.
Current predictions
Equity investors are being ravaged by numerous doomsday prophecies about new market dives of up to 35 percent. It happens every year before October, but I completely agree that there are many uncertain variables that can currently affect stock markets.
In addition, the US investment bank Goldman Sachs has published a very accurate assessment of the current stock market. Very concretely, it argues that the rise since June 22 is a so-called bear market rally, a major correction in a continuing falling market. Based on historical data, the correction lasts 44 days before the price losses reset, Goldman Sachs says. The bank’s analysis included some interesting models they developed, combined with a very classic argument that the American economy is coming close to a recession. These are valid arguments but what I think weighs very heavily in this is simply the fact that Goldman Sachs has connections with virtually all the largest funds and investors in the world and they always listen to what the bank says.
Many predictions about the stock market largely involve previous price developments but, of course, these are also related to macroeconomic factors. My assessment is that economic history repeats itself and one can learn from it. For example, causes for inflation have partially been the same for several hundred years. But the financial market never repeats itself exactly and therefore I do not exclusively use past price developments as the basis for predicting the future direction of the financial markets.
Learning from the past
It is completely natural and
incredibly important to include the experience that has built up from the financial market. It is the overall and combined insight one needs when looking into the crystal ball. It can be a challenge, but these are the assessments that are exciting.
In this connection, it is relevant to jump back to the beginning of this column. The crash in 1987 was because the stock market had surged too much, so I argue it was a regular bubble that burst. Despite the huge one-day price drop, the crash did not have a major impact on most economies around the world. Meanwhile, the crash back in 1929 had a close coincidence with macroeconomic developments and, in my opinion, both political and general developments in society.
Unfortunately, there are several developments today where one can find the same pattern from 1922 until 1929. For me, this gives reason for some concern but it does not make me assess the risk of a similar crash as particularly high.
My assessment remains that the financial markets are correcting. It is a violent correction but not a crash or the prelude to a final and all-destroying crash. In the entire western world, interest rates that have been too low for many years have to be corrected upwards, and that hurts. In addition, some energy prices in Europe also need to be corrected upwards because they have been unnaturally low for at least a decade, and right now, Europe is paying a high price for that.
A correction means that there is a bottom in the financial markets and there is life after the correction. There will also be a time after a possible recession but it will be a different world compared to today — a story that will be in a future column.