Long-Term Perspective – 100-years of History
While it is rare to have successive down years in the market, it does happen. The market experienced it four times in the last 100-years as marked on the chart below. What causes us to be cautious, besides common sense, is the longer-term position of the indexes. For example, the Dow has reached the top of its 100-year channel on the yearly chart below.
Then we can observe that the indexes share the top of the 100-year channel with the top of the 2009 bull market (monthly) channel – using the S&P 500 Continuous Futures Contract as our proxy.
As if we could top all of that, the weekly or intermediate channel is peaking at the same intersection.
So to say the market is overbought, overvalued, stretched, or whatever your favorite term might be is an understatement. What investors will now begin to experience is regression to the mean. Even if we were optimistic enough to believe that the markets will hug the top of their trading channels for a while, and they might, rising interest rates and inflation would negatively impact future returns.
Am I predicting a crash? No. Unexpected, exogenous events typically drive crashes. No doubt, we may see a few along the future path. And how does that path look? Let’s review the 1965 to 1984 Dow chart from this morning once more.
Now go back to the first chart above, 100-years of Dow history, and notice how the index traveled from the middle of its long-term channel back to the lower channel line over 16 years. Now you can see the associated volatility (otherwise known as painful corrections) in the detailed chart immediately above.
I believe that we are starting the process of moving toward the middle of the long-term 100-year Dow channel. Interest rates don’t typically fall to zero. We have experienced 40-years of declining interest rates. The investing future is likely to be different. A long-term (buy and hold) investor might find themselves in one of those directionless 10-year periods or lost decades as the market regresses to its long-term mean.
So strap in. We have a pretty wild ride in front of us. But at least you now understand where we find ourselves on the market roadmap.
A.F. Thornton