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Your Questions
ANSWERED
Markets
Performance!
by TOBY BIRCH,
How will the markets perform over the next
EXECUTIVE DIRECTOR,
Bank Julius Baer & Co Ltd (GSY)
twelve months?
The simple answer to the question is this; not smoothly. One of the most compelling pieces of evidence for a large
Stock markets are characterised by 4-year cycles that have advance comes from looking at performance charts. At its
been in place since 1934. Such periodicity may well be intra-day peak in March 2000, America’s most important
related to the US presidential terms of office but the fact it stock market index (the S&P 500) rose to a record of 1553
exists at all is more interesting than the cause, as it would as the technology bubble reached its zenith. In July 2007
appear contrary to academic logic. The rule of thumb is that the index again hit exactly this level and promptly fell by
stock markets undergo a significant sell-off every 4 years and 12% - a big figure indeed, but not enough to satisfy the 4-
by that we mean losses of at least 15%, from peak to year rule. This was a very bad sign which some interpreted
trough. The last time we were supposed to encounter such a as a negative ‘double top’ formation. By October 2007 the
(healthy) clear-out was in 2006. Instead it appears that the market had rallied aggressively and the old high point was
stock market is on an unstoppable upward course, taking breached: the stage is now set for a serious rise in equities.
credit crises and turmoil gleefully in its stride. While rising When share prices break their previous peak then this is
share prices make for an easy life, we should always remind taken as a buying signal by professionals and is not a cue to
ourselves that the forces of mean reversion will pull markets take profits.
back like an overstretched elastic band; or they will
eventually snap. The last time we missed a 4-year hit was in While charts may help with timing, it is ultimately the
1986 which was of course followed by the ’87 crash. With fundamentals that count. When the birth rate surged after
markets on a similar parabolic rise (vertically up the chart) it the War it led to a generation of so-called baby-boomers
would make sense to prepare for the worst in 2008, saving for their pension, directly or indirectly via the stock
assuming markets have not already been mauled by the time market. 2008 is a crucial year when that population bulge
this article is published. begins to retire, turning from net investors to net sellers of
equities. A similar phenomenon occurred in Japan in 1989
While it is tempting to batten down the hatches and make a and coincided with the peak of their property and stock
dash for cash one should not forget that the final phase of market bubble; the economy has been stagnating ever since.
the bull market is the most spectacular and therefore the To avoid the threat of Japanese-style deflation the American
most profitable. At such times euphemistic language government and central bank (theoretically independent of
abounds and new paradigms are the watchword - it will be each other) have acted in unison to pump up the economy
interesting to see what the next buzzword will be. This artificially. This has been achieved by issuing ever-greater
euphoria is of course an outward demonstration of a trio of volumes of government bonds to subsidise low taxes while
human failings: assumption, extrapolation and the fear of suppressing interest rates to protect the housing market.
missing out. Every bubble down the ages has exhibited
similar traits and while the object of our desire may vary, the The great paradox is that while they talk tough on inflation
behaviour remains the same. The trick of the trade is to their actions are the very cause of its resurrection. It is
ensure that one is not left holding an over-inflated asset as therefore no wonder that the gold price is rising while the
the final fool in a string of speculators. It is fascinating to see dollar slumps. If the path to prosperity comes from the
how selling volumes reach a climax as the price of bubble mass-production of money then 2008 will be no doubt be a
items peak. This is known as the distribution phase where bumper year for America; but it will be the first time in
smart insiders and institutions ditch their investments onto a history that such profligacy has not lead to serious inflation
gullible public. and eventual economic chaos. Happy New Year!
"QQS
JO (
BOE
KVSJT
1FST
"DU
20/20 thirty six
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