Festive FTSE
In the event, I was right. The FTSE fell into 16 December, incurring wholly unnecessary drawdown for those who’d tried to outsmart the market by going long too early. The turnaround that day was impressive, but the most tradable part of the rally began on 19 December. The upside was even more striking in the DAX, which I had earmarked as a likely better buy than the FTSE.
DAX takes flight
It is fitting that the markets should end 2013 like this. It has been a terrific year, with America’s S&P 500 storming ahead by some 26 per cent. This has prompted me to look back at other years where Wall Street has gone up by at least 20 per cent. Such annual gains are actually more frequent than I had imagined, happening in more than a quarter of all years since 1929.
Wall Street’s many 20 per cent years
Some of these bumper years came after heavy declines, such as following the depressionary collapse of the early 1930s or the inflationary crisis of the mid-1970s. At these times, the S&P was plainly cheap in terms of cyclically-adjusted earnings. Arguably, 2009 was such a year. Further gains generally follow such episodes, but it would be a stretch to compare today to late 1933, 1975 or even 2003. After all, the market has been going up for almost five years and valuations are lofty.
Today’s conditions – in terms of valuations and bull-market longevity – have more in common with the mid-1990s. Back then, the S&P went up five years running by 20 per cent or so. I see few parallels with the benign economic set-up of the early part of that era and that of today. I would therefore be very surprised if Wall Street went up by anything like as much as 20 per cent next year.
Optimistically, I reckon that 2014 could be like 1968. Then, like now, the market had risen by one-fifth in the prior twelve months and was dearly rated. Nevertheless, it added 8 per cent in the course of 1968. But I have a nasty feeling that it could end up being more like 1937, 1962, or 2000, where the market ended up suffering a decline.
Amidst the widespread bullishness as we enter 2014, one trader is taking a wholly contrarian view. Richard Jennings – who manages the Titan family of spread-betting funds – has just shifted to an all-out short position on the S&P. “We are at an inflection point here and it is very reminiscent of 2000,” he told me on 28 December. You can read his full thoughts here: http://bit.ly/K9RKKq
No S&P top yet
Among other things, Richard cites the near-parabolic advance in the index of late, the exuberance among Wall Street pundits, corporate insiders selling stock, and a set of technical conditions that have been seen only eight times since 1928, with seven being tops. It’s a gutsy call, to be sure. However, market tops – such as that of 2000 – often take time to build, and for now there’s no sign of that. I enter 2014 as a bull, therefore.
