The stock market is tracing out a similar pattern from the Watergate Era
Win or lose for President Trump in the ongoing impeachment battle, the stock market is showing strong signs that the outcome matters. As an investment strategist, I try to turn my head away and dismiss all of the politics. That is, unless it impacts the subject I focus on.
Specifically, I evaluate investment return and risk. So, as someone once uttered about the iconic Seinfeld character Cosmo Kramer in the “Seinfeld” TV series, the similarity between recent S&P 500 movement and the Watergate era is “a loathsome, offensive brute. Yet I can’t look away.”
If you have read my work here at Forbes.com over the past few years, you probably know I have been cautious regarding the stock market. The S&P 500 has held up better than most other indexes. Small caps and non-U.S. stocks have generally been inferior performers versus the S&P 500. This is a good news/bad news situation.
What we have here is similar to what existed in the 1970s. Back then, the investing public considered certain companies to be “one-decision stocks.” That is, you could buy them and never sell them.
The modern version of this is a bit more refined. We have now reached the point where too many investors assume that investing in the stock market is simple. As they see it, you buy the largest companies. You buy them in bulk via an S&P 500 Index fund, which gives them to you in the exact weighting of that index.
However, that index weight is based on the size (”market capitalization”) of the companies in the index. That means that the better a company does versus the rest of the market, the higher the index weighting. That may sound good, but it potentially makes indexing an exercise in buying yesterday’s winners, so to speak. This works for a while. And then that approach falls apart.
And that brings us back to this disturbing Watergate-era pattern. Specifically, the S&P 500 is acting a lot like it did before the Nixon-impeachment era decline. That bears watching (pardon the pun).
Here is a chart of the S&P 500 from its 1970 low through early 1973. Why choose that period? Because the U.S. economy had new life after a rough period in the late 1960s and into 1970. Market optimism was high, despite the continued stress of the Viet Nam war. The S&P 500 rose 71% in about 32 months. Not bad at all!
The S&P 500 has been on a similar run since February, 2016. It is up about 61% since that temporary market low. Very early 1970s-like.
Then, impeachment started to get serious. And, with all of the other reasons the market had to finally roll over, it was that intensifying political discord among the folks in D.C. that finally brought the market down. And, while it was not the only cause for what became a 48% drop in under 2 years at the low, it’s never just one thing that does it.
You see, we are in an era of multiple potential triggers to turn the long bull market into a bear market. And, even though the market and its participants were quite different back then, there is one thing that does not change at the core: human nature.
People still overreact in both directions when investing. They always have and they always will. The key is to both recognize it, and have a process and plan to confront it. To me, that means being prepared to be a more active investor, and use hedging techniques like the ones I have described in recent articles. After all, I don’t know what the stock market will do and when it will do it. But I do believe we are in a bull market for risk-management.
Related:
Bank Of America Says 60-40 Portfolios Are Dead. They’re Right.
