Market History: Secular Cycles - Part 1

Hi, welcome back. For this week and next, I will walk you through a brief journey back in time. A study on financial markets history is always instructive to understand how markets will behave.

Scientists are beginning to discover that the Universe manifests itself in countless observable cycles. From the smallest sub-atomic particles to the largest clusters of galaxies, they follow some kind of cyclic yin-yang order or rhythm. Likewise, societies progress, mature and decline before renewal sets off yet another cycle. What about the financial markets?

Prices may appear to move randomly, but with study show an underlying order and structure. Cycle analysis, Elliot waves, Kondratieve waves, Gann squares, angles, Fibonacci relationships and even postulations of planetary influences on financial markets are constructs and tools to help us uncover this underlying order. Psychologists and economists have also given a go at explaining the cycles of market boom and bust by attributing them to human behaviour through emotional cycles of extreme greed and fear, creating maximum energy at levels where turning points often happen. So, it seems, cycles are everywhere.

Recently, i purchased some data of the major US stock market indices over the past 100 years. When you have an opportunity to look at these vast amount of data plotted on a large chart, you will be amazed to see how the secular cycles (each lasting approximately 20 years) playing out in the stock market over the past century.

To many investors, the critical question is to know where we are now in the cycle so we can have some foreknowledge of what may be coming our way. Some call this forecasting.

In this and the next posting, I will share with you the secular cycles over the past century that I have identified from the charts. Whether to help you better prepare for the next looming crisis or just to pique your curiosity, I will outline the various crisis in each of these secular markets. I have also computed the exact magnitude the market moved and the time taken for a full recovery each time a crisis occured. You should find this information instructive. In each large secular cycle, there are usually one or more shorter counter-trend cycles.

So let's get started now! Back to the year 1906 we go.

# 1906-1919 : Reformative years

In the beginning of times, chaos reigned. Regulations and oversight in the financial markets were lacking and financial panics were rife. This was also the period where US continued to build on its industrial might having recently overtaken England as the world's largest economy. Ford Model T was introducted in 1908 and later that year, General Motors was formed. Technological feat led to the opening of the Panama Canal in 1914. War War 1 broke out later that year. The war actually accelerated growth for the US economy, bringing US GNP closer to $100 billion before the next decade arrived. The financial markets however remained flat over this period, as banking and currency reforms gradually took shape. Dow was at 110 points by end-1919, almost the same level as it was 13 years earlier.

(a) Panic of 1907:

      - Market dropped 45% over 9 months.
      - Full recovery 10 months later.

(b) World War 1 (1914-1918):

      - Market gapped down 33% when it was re-opened after closure.
      - Full recovery 9 months late, buoyed by growth from the war itself.

# 1920 - 1939 : Secular Bear Market

The 1920s was also known as the "Radio Age" where radio found its way into most American homes. This was also a dark age period for many Americans. The effects of Great Depression (1929) haunted the country for at least the next decade to come.

For the first 10 years during this secular bear market, the Dow actually rose from 110 points to almost 400 points. By 1929, with the onset of the Great Depression, the market not only gave back all its recent gains but turned into a steep loss. Such is the characteristic of a secular bear market where you expect to see wild swings and huge volatilities. The market collapse led to the formation of the Securities & Exchange Commission (SEC) in 1934. That year, Gold price was fixed at $35. By end-1939, Dow was back to a mere 150, closer to where it started two decades earlier. This was also a difficult time for the US economy. Its GNP recorded almost "zero" economic growth for a 20-year period. Literally, this secular bear market represented 2 lost decades for America and its people.

(a) Stock market crash of 1929:

      - Market plunged 90% over 36 months.
      - Full recovery took 25 years before Dow regained 400 points level.

Hope you had a fascinating read. Check in here again next week to find out where we are currently in the cycle and where we may go from here!