Words of Wisdom…..from 1929

Last week, the S&P500 took a pause from its recent string of retreats and inched back up 0.38% on light volume. Of course, S&P volatility crept back down in sync with the rise in equity prices. That said, the VIX Index is still closed higher than the lows reached during the summer doldrums. Essentially, last week’s action constituted a small reflexive bounce, a tiny bounce that’s very normal even during more extended periods of decline or topping in the markets.

It was a fairly light week in terms of US macro reports. On the negative side, the Empire State manufacturing survey plunged; it was supposed to increase. Industrial production missed badly. Housing starts missed. And jobless claims were worse than expected. On the positive side, existing home sales beat consensus estimates. And the Philly Fed business outlook survey beat expectations. Leading indicators and headline consumer prices met expectations, so no surprises here.

Technical analysis still points to a clear topping pattern on both the daily and the weekly charts—despite last week’s small gain in the S&P500. Upward momentum is still weak or absent, so all signs still point to more downside risk. Last week’s measly 0.38% dip does not qualify as a true retreat.

Finally, in his most recent weekly commentary, investment manager John Hussman posted the following quote:

“The recent collapse is the climax, but not the end, of an exceptionally long, extensive and violent period of inflation in security prices and national, even world-wide, speculative fever. This is the longest period of practically uninterrupted rise in security prices in our history… The psychological illusion upon which it is based, though not essentially new, has been stronger and more widespread than has ever been the case in this country in the past. This illusion is summed up in the phrase ‘the new era.’ The phrase itself is not new. Every period of speculation rediscovers it… During every preceding period of stock speculation and subsequent collapse business conditions have been discussed in the same unrealistic fashion as in recent years. There has been the same widespread idea that in some miraculous way, endlessly elaborated but never actually defined, the fundamental conditions and requirements of progress and prosperity have changed, that old economic principles have been abrogated… and that the expansion of credit can have no end.”


This was published by Business Week in November……..1929.  The point Hussman was making is this—something very similar is happening today, in US equity markets. And no matter what the explanation, the reasoning, or the analysis—the resolution to today’s “exceptionally long, extensive and violent period of inflation in security prices” will not end any differently.

It never has ended differently…..over the history of US equity markets. And it won’t end differently this time either.

And as Hussman points out—to believe that just because a huge market pullback, more accurately a collapse, has not yet happened so therefore it will not ever happen, means one is making a serious mistake. This is the same mistake investors make before every major (and minor) bull market ends…including the one that ended in 1929. And it’s the same mistake investors are making today.

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