“Luck is what happens when preparation meets opportunity.” – Roman philosopher, Seneca
Opportunity means nothing unless we are prepared. Otherwise, opportunity is lost. Preparation is a multi faceted concept that most people don’t quite grasp. We often think we’re prepared, but without actual, real world practice, at the moment of decision, our emotions take over, and we fail to act. There’s that old saying that we’ve all heard, “practice makes perfect”. But, in actuality, practice makes permanent. So, unless we are sure we’re practicing perfection, we are just making permanent what we are practicing. In most cases, it’s not perfect. So, how do we make sure we’re practicing perfection, or at least aiming at it? The best, fastest, and often cheapest in the long run, is to find a coach or model that has demonstrated a history of success in whatever we want to become proficient at.
Models come in all sizes and shapes, and a great one for learning when to buy and sell assets like stocks, bonds, real estate, commodities, etc. is history. While it seems so simple, most of us choose to not study the history of things we invest in. This is due to the past two decades of massive economic stimulation that the government has dumped into our economy and markets to avoid the dreaded recession that we all fear. However, we forget that recessions are good, as they cleanse the system that has become overheated and irrational during the prior advance…the good times. Sadly, most of us know that no party can go on forever. And, the bad stuff usually happens when we stay too long.
It’s the same with financial assets and market. Similarly, when the government elongates the economic expansion beyond the historical norms of expansions, bad things tend to happen. Debt is expanded beyond ability to repay. Rules are relaxed to the extent that quality deteriorates. Complacency replaces risk assessment. And, the train usually comes off the tracks.
The chart shows the stock market, represented by the ETF known as SPY, which mimics the Standard and Poors 500 index, going back to 1995. There is a very simple historic model, or coach, shown with yellow and blue lines. Once the yellow crosses the blue, the past trend is over, and the new trend is in force. So, at the very left, we see around 1995/96, the yellow crossed up through the blue, and the old bear market was over, with a new bull market in force (which tripled in price). That peaked in early 2000, then yellow crossed down through blue in 2001, signaling the end of that bull market, with the new bear market in force (which caused a 50% crash ). By late 2003, yellow crossed up through blue, and the new bull market was confirmed (which doubled in price). This ended in late 2007, and the yellow crossed down below blue in early 2008, signaling the new bear market had begun (which caused another 50% crash), lasting into early 2009. That window in history is know as the Great Financial Crises (GFC), as it nearly brought the global system down. Regardless of the reasons, though, the most important part of this history lesson/model is to understand the power of the signal. The governments around the world were so caught off guard that they vowed to flood the system with liquidity (cheap money due to slashed interest rates), thus launching the greatest bailout ever known. As you can see, it lasted longer and grew bigger than either of the past two examples (a seven-fold increase in price).
But, look at what just happened. For only the third time in the past three decades, the yellow line has crossed down through the blue. And, this time, it occurred after the most most egregious stimulus program any government has ever drowned its economy with. History not only suggests the S&P 500 is about to experience a 50% crash, like the last two times this “yellow down through blue” signal flashed, but also that this time could, or should, be even worse. For simplicity purposes, though, let’s just use the historical 50% measurement. If that were to happen, the stock market indices should fall to half their all time high prices. In this case, SPY would reach toward 240. That would be a 40% crash from the current level near 400, and be 50% below the all time high near 480. If worse than history, the next target level surrounds 100 +/- 30. If 130 is reached, a 73% crash will be present. If 70 is an 85% crash will have occurred. These are the possibilities bases upon historical data on price behaviors that HAVE OCCURRED in the past 100 years. They are not fantasy, as declines of this magnitude have actually taken place (Dow -90% into the 1932 crash low, Nasdaq -78% into the 2002 low, to name just two).
What’s the answer; the proper action? That is the big question that we have to ask ourselves, based on our wealth, liquidity, plans, exposure to the risk of the financial markets, and our time frames. It’s complicated. These are issues we work with our clients on, and are able to offer help to those that are looking for it. Please see our CONTACT page above to get in touch with us if you wish to discuss your individual situation.