Category Archives for "Market Analysis"

The Federal Reserve (Fed) cut the Federal Funds rate by 50 basis points or 0.50% on September 18. So does this mean that the economy is so weak that the stock market will sell off or is something else going on? Let's review what's happened in the last 30 years, 1994 to 2024. 

Mid-90's

The first chart below shows the S&P 500 Index (SPX) from 1993 thru 1996. The Fed raised interest rates 7 times, starting with +.25% in February 1994 and ending with +0.50% February 1995. The SPX chopped sideways during this time and then began a steady rise in 1995. 

The Fed then cut interest rates in July 1995 by 0.25% followed by two more cuts in Deember 1995 and in January 1996. The SPX kept rising into May 1996, had a small pullback in July then took off again steadily rising.

2000 to 2003 

The next rate cut cycle began in December 2000 with a -0.50% cut. This occurred nine months after the SPX peaked in March 2000. The Fed then cut rates 12 more times, with the last cut occurring in June 2003. At that point they had cut interest rates by -5.50%. Notice that the SPX hit bottom in October 2002, about 9 months before the last rate cut.

2007 to 2008

The next rate cut cycle began in September 2007 when the Fed cut rates -0.50%. The SPX peaked 3 weeks later. The Fed then cut rates 9 more times for a total of -5.50%. The last cut occurred in December 2008 and the SPX bottomed 3 months later in March 2009. 

2019 to 2020

The next rate cut cycle began in July 2019 when the Fed cut rates -0.25%. They then cut rates 2 more times before the Covid panic in March 2000. In March 2020 the Fed cut rates -1.50% in a 3 week period. The SPX bottomed during the very next week. This set off a rapid rise in the stock market because not only did the Fed cut rates but they dramatically increased their balance sheet by buying everything in sight and thereby injecting a huge supply of money into the system.

2024 to ......

And now the Fed began another rate cut cycle with the -0.50% cut on September 18, 2024. So is the market about to peak like 2007 or is this more like the mid-90's. Over at Charles Schwab, Liz Ann Sanders and Kevin Gordon published an article back in August that looks back at the 14 Fed rate cycles since 1929. Interesting article that provides additional insight. You can read it here. 

The stock market shows some interesting tendencies when it comes to its path throughout a decade. In this post I will review what occurred in the Decade Cycle over the last 100 years. Then I'll apply those tendencies to the current decade to see what may be underway.  Keep in mind this is just one cycle of many cycles influencing the stock market but it's amazing how well it repeats.

First let me say that I start the count for the decade cycle with year 1.  So even though we say 1930 is in the thirties, I count it as year 10 of the 1920s cycle since we don't count to 10 by starting with zero, we count 1, 2, 3....10.

So I looked at 10 decades starting with 1921 - 1930 using data from the Dow Jones Industrial Average (DJIA).  See the table below.  

Early Decade Low

The first fact that leaps off the table is that eight of the ten years showed the low for the decade in either year 1 or year 2.  But let's take a look at the two decades that didn't show this. 

1971 - 1980 had a low for the decade in year 4 BUT when we look closer you see that the low occurring prior to the high for the decade, happened in year 1.  

And the 2001 - 2010 decade had a low of the decade in year 9, BUT the low prior to the decade high occurred in year 2.  So the Decade Cycle indicates that our low made in 2022 has an 80% chance of being the low for the decade and a 100% chance of being the low prior to the high of this decade.

2nd Half Highs

The next fact that arises is that the the high for the decade occurs in years 7 - 10 in eight of the ten decades.  See the second column in the table.  And if we add in the high in year 6 for the 1961 - 1970 decade, then we can say that nine out of ten decades had their high in the 2nd half of the decade in years 6 - 10.  

The 1971 - 1980 decade had a high in year 3 and was extremely volatile.  It did have highs in year 6 and year 10 that came close to the year 3 high but the 1973 high remained the high for the decade.

So the Decade Cycle indicates that there is a 90% chance that the high for 2021 -2030 will occur sometime in 2026 - 2030.

Up in the Middle

The third fact that jumps out at you is the column titled Years 4 - 6.  This is the middle of the decade and we are in year 4 right now.  All ten decades were positive for these 3 years.  So there's a high probability that on December 31, 2026 the DJIA will close higher than 37,689.54 which is where it closed on the last trading day of 2023.

Election Year in Year 4

We are in year 4 of the Decade Cycle and it's an election year.  Five prior decades in the last 100 years had presidential elections in year 4. All of the highs for those decade cycles occurred in years 6 - 10. Those were the 1920s, 1940s, 1960s, 1980s and 2001 - 2010.

So based on 10 decades of data covering huge rallies, crashes, depressions, recessions, war and generations of stock market participants there is a high probability that the low for this decade has been seen and the high is still to come.  One thing you can be sure of...there will be plenty of volatility.

There's a confluence of cycles occurring in the economy/stock market.  The Fourth Turning,  Elliott Wave SuperCycle,  18.6-year economic cycle and several others.  I've discussed the Fourth Turning before. Neil Howe, the co-author of "The Fourth Turning, An American Prophecy", pub. 1997 and "The Fourth Turning is Here" pub. 2023, believes we are in the midst of the Fourth Turning which began in 2008 and will end  in the early 2030's possibly 2033. 

Of course I've also discussed the long-term Elliott Wave cycles.  Cycle Wave V of SuperCycle (III) either ended in January 2022 or is in the final stages.  The price action will soon confirm the timing. I've recently been introduced to the 18.6-year economic cycle related to real estate and the economy that is impacting the Elliott Waves.  It has very significant implications for the stock market and the economy and ties in nicely with everything occurring now. 

As a member of the Foundation for the Study of Cycles I became aware of Akhil Patel and also Phil Anderson who has extensively studied the 18.6-year economic cycle. Here is what I've learned: 

Each cycle has four phases.

Phase I is Recovery.  The prior cycle has ended and the economy recovers. Over the next 6-7 years the economy grows and confidence returns.

Phase II is a Mid-Cycle.  In this phase a minor recession takes place.  This generates some fear but it turns into a relatively short slowdown with no real financial crisis.

Phase III is the Boom.  This leads to a much stronger boom over the next six to seven years which generates higher growth, surging stock and property markets.  This phase concludes with about 2 years of extreme bullishness and FOMO, before the cycle finally reaches its summit, 14 years after it began.

Final phase is Crisis.  As Akhil Patel says: "The cycle ends with a terrific crash and depression.  The economy must be rescued from its deep malaise;  the ruins are cleared over a period of four years.  The 18-year cycle ends, and a new one begins."   

This 18.6-year cycle in the economy has been going on for over 200 years now.  Sometimes it gets interrupted by major events like World War II. Its length has been has short as 17 years and as long as 21years.  The following is a diagram that visually explains the cycle.

So the current 18.6-year cycle began in late 2011/early 2012 as the economy started recovering.  The unemployment rate in the United States hit a peak of 10.0% in October 2009 and then started to decline.  By October 2011 it reached 8.8% and continued slowly dropping.  The stock market bottomed in March 2009, ahead of the economy as is usual. The end of the recovery phase occurred in about 2019.

Then the Mid-Cycle period began and included the brief recession at the beginning of the Covid pandemic.  So in late 2020 the next phase began. The Boom.

The Boom period began in late 2020/early 2021 and is projected to run into 2025-2026 timeframe, ending about 14 years after it began.  At that point everything peaks and the crisis period begins. As mentioned above the crisis period is expected to run about four years.

So an 18.6-year cycle that began in 2012 implies that the end of the Elliott Wave SuperCycle is delayed. And therefore the end of Cycle Wave V has also not occurred and will push higher for 2-3 more years. This drives my alternate count on the indexes.  Monitor the price action closely...and fasten your seatbelts.

Professor Robert Shiller's CAPE (Cyclically Adjusted Price-to-Earnings) ratio, also known as the Shiller PE ratio, is a widely followed valuation metric for assessing the long-term valuation of the stock market. It differs from the traditional P/E ratio by using a longer-term average of earnings to smooth out the impact of economic cycles and provide a more stable measure of valuation.

The CAPE ratio provides a great historical context for stock market valuations, allowing investors to see how current valuations compare to historical averages. Let's take a look at the following chart of the CAPE ratio using stock market data since 1871.

The current CAPE ratio sits at 30.8 for September 2023. This is a preliniary reading as all data inputs are not finalized yet.  The CAPE ratio has declined from a very high reading of 38.6 in November 2021.  This reading coincided with the top in the Nasdaq and just prior to the peak in the Dow Jones Industrial Average and S&P 500 Index in January 2022.  You will notice that this peak in valuation was higher than 1929 and second only to the extreme achieved in the Dotcom bubble of 1999-2000.  2021 had its share of craziness and extreme market activity creating a bubble for the ages.

One of the key insights from the CAPE ratio is the concept of mean reversion. Historically, when the CAPE ratio has been high (indicating overvaluation), subsequent returns have tended to be lower, and when it has been low (indicating undervaluation), subsequent returns have tended to be higher.

Coming down from the 2021 peak, I believe we are in the process of stair stepping our way down. We could very easily do something like what occurred between 1966 and 1982 when the stock market basically went sideways for 16 years with wild swings. Or we could take the elevator down like after 1929 and 1999.  How low? No one knows.  But everything moves in cycles.  Just look at what has happened in  the bond market recently.

There is something else that I hadn't noticed before.  Look at the CAPE ratio readings in 1921 and 1932.  The stock market went lower in 1932 but the CAPE ratio provided a bullish divergence indicating a long-term bottom.  And a similar thing occurred with the CAPE readings of 12/1999 and 11/2021.  Stock market in 2021 was much higher than 1999/2000 but the CAPE ratios provide a long-term bearish divergence indicating a possible long-term peak.  

Now the CAPE ratio is not a precise timing tool for short-term market movements. High or low CAPE ratios do not necessarily predict immediate market crashes or rallies. Markets can remain overvalued or undervalued for extended periods, and other factors, such as interest rates and economic conditions, also play a significant role.  

But CAPE ratios do indeed provide perspective on where the market sits compared to previous times in history of overvaluation and undervaluation.  The CAPE ratio is saying this stock market is still extremely overvalued.