A common colloquial saying in finance is a quote often attributed to Market Twain, that history does not always repeat but it often rhymes. Having just finished reading Bull! A history of the Boom and Bust, 1982-2004 by Maggi Mahar, the book closes with a look at investor sentiment and risk appetite in 2004. If I were to copy and paste the entire last chapter, you’d think it was taken from a Bloomberg or WSJ article written today. Investment legends like Warren Buffett were still bearish and many investors were still licking their wounds from the decline that put an end to the tech bubble.
We may not be repeating 2004 today, but the environment has many lines that do seem to rhyme. The Fed had cut rates to a multi-decade low of one percent, the President had just pushed through a stimulus effort via a tax cut, the trade deficit was ballooning while the dollar was under pressure.
In his Berkshire Hathaway annual meeting, Buffett said, “We have not done anything, because we don’t see anything that attractive to do.” Warren is someone the market has grown used to turning to after periods of market stress as the cornerstone of rationality and to sound the “all clear” that it is okay to get back in the proverbial equity pool. After one of the sharpest declines in stock market history, many were left scratching their heads while ordering supplies for their bunker after hearing Buffett was still not seeing value just yet. If Buffett doesn’t see value, how could anyone else? Well different lenses provide different viewpoints.
The same sentiment was shared by Buffett back in 2004 too. In his letter to shareholders Mahar notes Buffett’s comment, “Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us.” The S&P 500 had just been practically cut in half, but Buffett was still cautious. By March ’04 when Warren wrote his letter, the S&P had bounced 45% off its 2003 low with a full year having passed.
The stocks that were showing the most strength out of the depths of the tech crash were those most beaten up, very similar to today with airlines, retailers, and cruise companies seeing massive moves higher after being left for dead in March. The market at the time didn’t care about profits or balance sheets or debt. Benjamin Graham’s, Security Analysis had been tossed aside for the methodology of mean-reversion trading. This perplexed many as Mahar notes: “Consider the rally’s leadership. In December of 2003, one portfolio manager summed up the quality of this new bull market: “If you had told me that the market was going to be led this year by small, low-priced stocks of money-losing companies,” he confided to a Bloomberg columnist, ‘I would have said you were crazy.’”
Richard Russell, editor of the widely popular newsletter, Dow Theory Letters, earning substantial credibility after famously calling the 1974 bear market and then the low after the bear’s completion. Russell warned ahead of the ’87 crash with Hulbert Financial Digest rating Russell as one of the top market timers in the 1980s and 90s. However, even Richard was nervous coming out of 2003, calling the initial move a “suckers rally,” as Mahar quotes him as writing, “The sharpest and most explosive rallies occur not in bull markets but in bear markets,”
Jeremy Grantham, a highly respected investment manager at GMO and was the creator of the one of the first index funds in the 1970s. Mahar writes of Grantham’s observation that the government and the Fed can prop up a market for a period of time but his longer outlook remained a concern: “GMO’s Jeremy Grantham shared his fears. Grantham advised his clients that the market might well remain “relatively stable” for another twelve months. It was after all, an election year. “The lesson learned from 2003 is very clear,” Grantham observed, “never ever underestimate the desire of an administration to be re-elected or the substantial cooperation that the Fed will typically provide.” His warning was blunt: “The outlook for 2005 and 2006 looks about as bad as it could get.”
I don’t share these to point a finger at these great investors. At market turning points, even the most successful among us, who often are operating on much different time horizons, may be slower to respond or simply be wrong when the period is looked back upon years later. This doesn’t discredit their achievements or results.
I am first to say that I’ve been overly cautious since the March low was put in. I (thankfully) didn’t put all my “investment eggs” in that basket, still practicing diversification of assets AND analysis. I recognized the capitulation environment in March but history had showed we historically see a test of that low – and we still could (anything is possible) but the data has greatly improved and that thesis has lost some ground. I wrote several blog posts of market developments that often reference bear market rallies vs. final lows. For instance, the percentile of volatility remaining above 30th percent suggested a counter-trend rally, we then saw the VIX move below that threshold, taking a step closer to suggesting the rally had staying-power. Then I wrote a post looking at using market breadth and trend to find signs of a final low, seeking the equity index to capture its 200-day moving average and a significant rise in the percentage of stocks above their respective 50-day moving average.
While there is plenty to be worried about in the world, the GDP is expected to fall by 50% in Q2 and millions are still without work as not just the country, but the globe fight the Coronavirus. Businesses attempt to safely reopen, with little to no outlook on their earnings growth, leaving many in the dark who use a fundamental lens in their analysis. I find it truly fascinating the similarities of today and 2004 in the sentiment of large institutional investors like Buffett and market timers like Russell. They steer tankers in the financial market seas, of which cannot be turned on a dime. I don’t believe we should simply ignore their commentary; Buffett is and always will be a trusted guiding light for many other investors, but I’d point to his time frame and compare against their own when reading his writings.
Market history can teach important lessons, giving possible route maps to where price may go. There’s no requirement that these historical paths to be followed, outside forces like trillions in Fed intervention can redirect the course and thus must be recognized. I truly enjoyed Maggi Mahar’s book and highly encourage anyone interested in studying market history to give it a read. Walking through the setup of the 90s bull run and the resulting collapse provides many lessons and interesting stories to uncover.