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“Nobody Has Ever Seen This Market”

Posted by Larry Doyle on November 12, 2009 8:22 AM |

“I’ve seen this market before” is a very commonly used phrase by Wall Street professionals to compare and contrast different periods.

For example, when the Treasury yield curve is steepening or flattening, many market pros will project what will happen in different segments of the market based on discounting cash flows under the steepening or flattening scenario. Similarly, when credit spreads are in a widening or tightening trend, market pros will project how higher or lower rated investments will typically behave.

These projections are all based upon prior experience. The pros are utilizing a combination of market fundamentals along with investor sentiment to make forecasts. They will overlay their current forecasts against similar trends during prior cycles. Not that markets are ever perfectly symmetrical, but ‘having seen a market before’ is often a strong indicator of current and future price action.

Against this backdrop and given the challenging nature of the current market price action, I would challenge any market analyst or pundit who would utilize a similar approach today.

The simple fact is, ‘nobody has ever seen this market before.’ Why? Because this market has never transpired previously. Certainly, we have seen bull markets. We have seen low interest rate markets. We have seen accomodative Fed policy. We have seen bubbles. All that said, we have never seen a market in which global cross currents combined with ongoing fiscal stimulus have impacted markets to this extent.

In fact, I think one could make the case that the market is doing better as large parts of our domestic economy and the global economy are actually doing worse. While traditional schools of thought would view that correlation as perverse, the economic strains are compelling global governments to keep stimulus programs in place.

What is the result? A rallying market with increasing potential that the market develops into a blowoff. The irrationally positive nature of a blowoff is akin to a wholesale dumping of securities in a selloff.

Keep your head and stick to disciplined investing. Respect the price action, but do not get overly enamored with those analysts telling you what will happen . . . because ‘nobody has ever seen this market.’


  • Dave

    I think many people are looking back at the 20th century to study bull/bear markets to identify longer term market direction. I see no period in the 20th century where there were two back to back %50+ bear markets over a rolling 9 year period. The 20th century was the long story of the rise of the USA as a world power. The 21st may not unfold in the same manner. All the buy and hold mantra is predicated on the market always going up which was the truth of the 20th century.

    But …

    If you look back at the 18th and 19th century stock markets you can see secular bear markets that would break the back of even a Warren Buffet style buy and hold investor. The South Sea Bubble and its aftermath in 1720 created a long sideways bear market on the London stock exchange that lasted a HUMAN LIFETIME !!!

    If I printed out a chart of the S&P 500 and traveled back in time to London in the 1800’s the reaction of an investor in that time period to what has taken placed between 1998-2009 would be a yawn, for him the 1998-2009 S&P 500 would represent garden variety stock market volatility.

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