You better stop, look around
Here it comes, here it comes, here it comes, here it comes
Here comes your nineteenth nervous breakdown
- Jagger/Richards 1965
Investors can be forgiven if they think they are having a nervous breakdown. After three years down in the market there is still no real sign that we have reached a bottom. Investor's withdrew mutual funds for 10 consecutive months then after a pause in February for RRSP season they resumed their withdrawals in March. The picture in the US has been similar if not worse.
While Investors can be forgiven for their nervousness the continuing bullishness of the parade of fund managers is quite baffling. But then it is in their interests to be bullish as success of their fund is dependent upon an ever-increasing stream of money coming into the fund to be placed into a rising market. Too many of them continue to believe that this is just a blip on the screen and that the bull market of 1982-2000 will soon return. That bullish sentiment prevails into advisory services as well. In a sense it is logical as it pays better to be optimistic then it is to be pessimistic. While we suppose it is easier to seek out the positive the negative just seems to keep getting in the way.
Rising unemployment, the stress of record amounts of debt, rising bankruptcies and foreclosures, declining consumer sentiment, the war in Iraq and now SARS (Severe Acute Respiratory Syndrome). So far SARS has mercifully only killed about 125 people mostly in Asia and China and sickened only about 2,500. But it is the fear of it spreading that seems to be having the biggest impact.
While it has spread it is in historical terms pretty mild as far as epidemics go. That is not to lessen the risk and the possibility that it might spread even further but it should be noted that the Spanish Influenza of 1918-1919 killed between 20-40 million worldwide more than died in the Great War that concluded in 1918. Also more people died from it then the Black Death Bubonic Plague of 1347-1351. AIDS has claimed upwards of 500 thousand Americans to date and over 20 million worldwide. So at this stage it is important to keep things in perspective.
But it is already having an economic impact as restaurants empty, malls empty, flights, particularly to Asia are cancelled, conferences are cancelled and people avoid having to come in contact with other people or in areas where there is some risk. If it is contained, the economic fallout will be small but if it does spread then the economic fallout could be considerable. Unlike the AIDS epidemic this one spreads through mere contact or proximity so it could yet prove deadly if not contained.
But at least it is a common enemy, one that everyone can rally around irrespective of reports of those who would like to point fingers of blame at certain groups. Not so with the war in Iraq. Here passions rage on all sides. We have been treated on more than one occasion with literal screaming matches on TV talk shows. Editorial writers on both sides of the equation have been emotional (mea culpa). And it is not just a left-right thing as some of the nastiest pro-con matches have been between those on the right.
Nor is the disagreement limited to writers, talk show attendees and other pundits. There have been some significant disagreements in the military itself. Many have been seen on TV criticizing the execution of the war. It has also raised tensions in the administration. According to reports there is clear tension between the military and its Secretary Donald Rumsfield. And there is clear tension between countries particularly between the United States and those that did not join the so-called coalition of the willing. Tensions have the capability of escalating into more serious spats that could prove to be very debilitating for a world economy that is already slipping.
And there is also an interesting battle going on in the media. The mainstream media is being accused of suppressing information, just passing on information that is fed to it by the Administration and jingoism. But today with the Internet people have access to news that would not have been available in the past. In 1991 at the time of the first Gulf War everyone was glued to CNN. But today CNN is not the only all news channel. With news channels like Al Jazeera, the CNN of the Arab world there are clear alternatives to CNN and the mainstream press.
While CNN and others primarily center on the US forces, Al Jazeera and others show more of the horror of the war particularly the growing civilian casualties that even the Red Cross have described as "overwhelming". Of course they engage in their own form of propaganda that is counter to CNN's. Numerous alternative Internet sites have well documented heavier traffic then traditional sources like CNN or MSNBC. There has been so much concern about these sites in some quarters that they have faced constant hacking to disrupt them and in the odd instance they have been shut down. This is particularly true if the views or news is counter to the spin of the US administration or the mainstream news media. The media is reflecting the battle of freedom of speech and the press versus the call for patriotism and loyalty.
But this growing polarization of thought was visible long before the start of the war in Iraq. Over the past decade this difference was seen in western nations most specifically between the growing anti-globalization and environmental movements versus corporatization and its bodies represented by the World Trade Organization (WTO) and the International Monetary Fund (IMF). Now it has spread to countries as it threatens to engulf world bodies such as the United Nations and NATO. A divide between east/west and Muslim/Christian is one thing but a divide in the west itself is another.
Finally James Dines of the Dines letter recently noted another phenomena of mass psychology. The last major market top was the rolling top of 1966-1968. The Vietnam War and the opposition to it by the anti-war movement highlighted this period. Today we are once again past a market top and there is a war that is being greeted by huge anti-war demonstrations that have gone world wide and not just contained largely in the USA, as was the case with the Vietnam anti-war movement. History does have a odd way of repeating itself.
A world turning on itself coupled with declining economies and growing internal and external divisions due to a war is not an atmosphere for positive investing. The current market is reflecting this deep division of thought particularly over the past several months. There is a clear struggle going on between the bulls and the bears. At best the past six months could be termed as a flat. We are all reminded, however, that we are in a secular bear market, the major trend is down and we are caught in the grip of the Kondratieff winter.
Michael Jenkins of Stock Cycles Forecast has often noted the importance of past cycles. A few cycles he has often cited as possibly dominant this year are the 100 (1903), 90 (1913) and 30 (1973) year cycles. 1903 saw a banking panic. 1903 saw a banking crisis. The Japanese banks remain bankrupt and there are problems in the German banking system and the British insurance companies. Here in North America the banks have been hit with huge loan losses as a result of the telecommunications and technology collapse. In 1903 the market topped in February and had lower tops in March and mid-April before completely going off the cliff. The market bottomed in November.
1913 was the year before the war but the drums were beating. Today we are once again in a war mode and the war on terrorism is one not measured in months but will be measured in years. Again in 1913 there was a high in early March and again in April before we collapsed into June. We would also note 1953, which was also a war year only this time in Korea. The high for the year was in January followed by secondary highs in February and March before falling off. A low in June got a summer rally under way but we hit the lows for the year in September. 1973 was a year of tensions with the OPEC oil embargo, a falling US$ and the beginnings of the Nixon Watergate nightmare. A high was seen in mid-April and except for a brief summer rally it did not bottom until August/September. A sharp fall rally was followed immediately by another collapse that took us to new lows in December.
But the bulls are hopeful and there best hope right now is the 1993 Tokyo Nikkei Dow chart, which is another cycle, mentioned at times by Mr. Jenkins. The reason for the 1993 Nikkei Dow chart is some similarities between the current market and that ill-fated market. The current market topped in 2000 while the Tokyo Nikkei Dow topped in 1990. So for both this is 3 years from the top. Like the current market the Nikkei rolled around in some violent ups and downs for six months (August 1992 to February 1993). The final low in February, however, was followed by a 20%+ rally into the summer. The rally held with one significant interruption until mid 1994 before collapsing to new lows in 1995.
We point this one out because it is possible especially with any real elation over a short war that allows the market to get up a head of steam. A comparable rally today could carry the S&P 500 to 1000/1050 and the Dow Jones Industrials to at least 9100 and possibly as high as 9800. We put less stead in this scenario but point it out because it is possible. A market that is pre-empting a conclusion may be setting itself up for a classic buy the rumour sell the news scenario. But with a declining economy and a world slowly turning on itself and countries divided we wouldn't blame investors if they had a nervous breakdown. We leave you with charts of the 1953 Dow Jones, the 1993 Nikkei Dow and the current Dow Jones Industrials.