Having been an investor through 1999 and 2007, 2023 is giving me some major deja vu. I’m not sure which is the better precedent, but the feeling of having been here before is hard to shake. The current AI frenzy feels like the dotcom hysteria. Stock valuations are about as elevated. The inflation scare, rising rates backdrop and the banking fracas remind me of 2007 and the infamous subprime slime. It’s even tempting to liken last spring’s SVB debacle to 2008’s Bear Stearns.
Simplistic analogies can only be pushed so far. But they’re fun, and they do convey a fair image of where I suspect we may be in this market cycle. If it’s like 1999, stock prices would top out next March. If it’s like 2007, they would top out in October. Next year, 2024, would either be 2000 or 2008. That those would be an even 24 and 16 years from their antecedents may not be entirely accidental. A 8 year cycle would also be consistent with the important low of 2016.
Another issue is that the June CPI may turn out to have been the low for the year. Remember the headline figures are year over year changes; this automatically cancels out seasonality, but introduces an average six month lag. Due to the base effect of the leveling off of last year’s increases in the second half, the year over year comparisons get tougher from here. We could easily see figures rising from the 3% growth reported in June. Stock prices responded negatively to CPI increases last year, and they could be a stiff headwind in this year’s second half.
We also have the yield curve inversion, addressed at length in Market Outlook and Omen. Here’s an excellent analytical roundup from Chris Yates:
Stock Market Vulnerability On The Rise
The bottom line … stocks could continue to zig-zag their way higher for months to come, and still not be out of the bear market woods. Given current levels, new highs are far from out of the question. Whether subsequent lows breach last year’s October lows is neither yet knowable nor even that important … the totality of the evidence is that a substantial decline is highly likely, even if from what levels will only be known in hindsight.
The gist of it is that if 2023=1999+2007, then 2024=2000+2008. It may not make good arithmetic, but it may nevertheless make sense.
i’d like to nominate 1987. rising rates while the market still climbs. bulls feeling invulnerable because of the fed put instead of portfolio insurance. the potential for the indexing bubble to run backwards just as portfolio insurance did on the way down. highs were in august iirc. crash in oct.
Thanks JK … never crossed my mind, maybe because I wasn’t investing then. I clearly recall it, but only from seeing it on the news and reading about it historically.
Evidently we’re not the only ones with the historical analogy bug this week … just found this article on Advisor Perspectives:
2023 Rhymes with 2007
every month 401k inflows are directed into target date funds, with the equity portion put into index funds and thus supporting “the magnificent 7” which are holding up the s&p and the nasdaq while the s&p 493 languishes. the advisor perspectives article linked above points to cre weakness as somehow comparable to the subprime problems in the mid-2000’s, but i’m not convinced it’s comparable. just yesterday i read about starwood walking away from a $210million mortgage on a building in the buckhead district of atlanta, and we’ve seen brookfield and pimco walk away from big mortgages, as well as black rock gating its private reit. but i don’t know that the banks themselves are holding a lot of cre paper the way they held a lot of subprime in inventory while they were making the sausage. [if you haven’t seen the movie “margin call” i highly recommend it- great fun.] cre debt seems more a problem for regional and local banks, and holders of cmbs. so i’m searching for a trigger. maybe enough earnings misses and margin shrinkage, like yesterday’s reports out of netflix and tesla, but it has to hit the core – microsoft, apple, amazon, alphabet, nvidia… see any catalysts out there, bill?
Aye … whatever its original motivation, the 401(k) business is no longer driven by the best interests of employees. It’s turned into a racket automatically funneling billions of their hard earned money to corporate oligarchs each month.
My crystal ball doesn’t reveal any one clear catalyst. CRE might play a role without being the sole prime mover. Personally I’m most partial to Chris Yate’s view linked in the previous post.
I’m not trying to quibble over what particular year or years might make the best single parallel to the current setup. In reality, none will be an exact match and inherently we can find weaknesses in any of them. The closest we may come is an amalgam of precedents.
The Hickman article goes into detail about 2007, but the gist of it is that things can look superficially hunky dory and still be on the eve of collapse. I’m drawing partly on hard analytical data, but also partly subjective impressions to that end. One respect in which I think we may be looking at a sort of combined 2000-2002 – 2007-2009 type of situation is that it could combine both the duration of the former and the intensity of the latter. If it were to kick off with a 1987 style crash too … well …
… suffice it to say that would not be good news for those eagerly getting over their skis in stocks.
Another AP article highlights how out of whack the US supercaps have gone. Even the Nasdaq 100 had to rebalance to keep index managers within their concentration limits:
Nasdaq Rebalance Spotlights Risks from Supersized Set of Stocks
Just the ten largest stocks are worth more than the entire Russell 2000, the entire MSCI China, Nikkei Japan, FTSE UK, & DAX Germany.