Published by the SCMP on 21 May 2014.
Marilyn Munroe starred in the movie, ‘Seven Year Itch’, in 1955, about a platonic relationship between a pretty girl and a married man – that included the famous rising dress blown by the passing subway train. By the standards of the time it raised eyebrows, but the scenes that did not make the final cut seem, these days, to be witty and amusing rather than shocking.
Perceptions regarding long-term stockmarket analysis can be similar – a bit tame though mildly entertaining. Share prices incorporate the myriad news that impacts a market or company. They are the ultimate expression of Adam Smith’s Invisible Hand”. There can be some big revelations in a study of the last half-century of the Hang Seng Index, which spooked by the 1967 riots, touched a low of 65.
The Hang Seng was discovered by hot global money in the early 1970’s. The market crossed the 200 threshold in 1971 to soar to a peak of nearly 1,800 by early 1973, a rise of some 27 TIMES since 1967. The subsequent collapse was caused by the abandonment of the post-WW2 Bretton Woods currency accord and the oil shock. Like the Duke of York, the Index came crashing down the hill, through the 200 level to bottom out around 150 by December 1974.
Peaks are important because they show market sentiment at a major turning point. The charts indicate that the true value of the market at the 1973 peak was around 250, rather than 1,800 – and even that was a big rise from just a few years earlier.
Peaks of 40 years ago look insignificant against later highs, which took the market on 29th October 2007 to 31,850. Moving back in time, the previous record was the ‘dot com peak’ in March 2000, of 18,301. Further back was the ‘Asian Tiger peak’ in early August 1997 (just after the Hong Kong handover) of 16,647. Prior to that was ‘Greenspan’s interest rate peak’ of January 1994 (that printed 12,157; the market having doubled in 12 months). Backwards still, the notorious ‘Black October’ of 1987 topped at 3,902; while mid-1981 saw it breaking 1,800 before failing; and thence to the 1973 peak of just under 1,800. The peak before the Hong Kong disturbances was in 1965 when the Index broke 100.
Over the last half-century, the market has recorded peaks in 2007, 2000, 1994 1987, 1981, 1973, 1965; giving a very neat 7-year cycle. Markets do not work in straight lines or numbers, they overshoot and undershoot, so we can give or take a year or two; or even a peak. Hong Kong may have not made a high in 1997 but for its proximity to the Asian Tigers, being already mature. Excepting that peak, the pattern is preserved.
Herein lies a key lesson in Behavioural Finance. “Plus cą change, plus c’est la même chose”. “The more things change, the more they stay the same”. We believe, as we look at the markets in a modern context, that we are more sophisticated and different but history tells us that the human psyche is inclined to do similar things.
Perhaps it is based on the average experience of market participants. It takes seven years to train investors or dealers to where they can make responsible decisions about other people’s money – but training is not the same as experience. They are the classic suckers of behavioural finance; showing greed by doubling up at the top with borrowed money, and fear by panicking at the bottom.
2014 should fit worryingly into the market’s Seven Year Itch but this 7-year cycle looks squashed – unpowered by the liquidity caused by printing money or falling interest rates that kept us going for 50 years. The underperforming Chinese economy is unlikely to push the Hang Seng to a 2014 peak; otherwise the charts indicate that it should be nearer 28,000.
Regardless of our situation, Wall Street has seen maybe 50 new highs in the last year and we know that the Hang Seng can’t resist a fall on the Street. Could 2014 signal the start of another decline, perhaps a weaker one as we have not experienced a full peak?
Market troughs tend to occur some one and a half years after the peak, which takes us nervously to 2016. However most Western economies seem robust so perhaps we should push our concerns out to 2018, especially if we can find the energy for a boom before then. The behavioral cycle has been flattened out or deferred this time. But it would be very brave to say that it has been broken.