I was there in '74.
What a real bottom looks like
From Comstock
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A Comparison: 1974 And Now
A View Of Extreme Pessimism
The pundits have apparently decided that we reached a downside extreme on Friday, and that now is the
time to buy stocks. If this is a downside extreme, it is a most peculiar one. The classic downside extreme
of the past 30 years was the one that marked the 1974 bottom.
That's what it looks like on charts, but from my personal experience, the '69 downside was worse, as was that of 11/73. For making money the first half of '82 was better than the last 2 years. You had to be an amateur to make money in the '00 -'02 down side, because you had to hold a portfolio of shorts for the long term. That strategy has worked only in the last 2 years out of 200 years of stock market existence. In a true bear market, bears aren't rewarded, and the market continually corrects to the upside which shakes out shorts. In the last 2 years the upsides have been so brief that they had no shake out power.
Then, as now, there was a lot of bad news around about the economy and the world in general, and the air was full of gloom and doom.
The only doom and gloom was Nixon resigning and the realization that stagflation wouldn't be leaving due to 'crat control of Congress.
In early '73 interest rates were rising to reflect rising structural inflation, but the stock market almost ignored it although it did gradually decline. The sentiment was very positive. That was when to have "doom and gloom", but few could see it, and it wasn't profitable to know it was bad. How bad was Nixon's resigning? It was good, but that wasn't the way people wanted to spin its effect on markets. When the Yom Kippur War started with the ensuing Oil Embargo, Wall Street's response was nothing but sugar coated. It took a week for Wall Street to realize that profits would be hammered by the Oil Embargo.
Nevertheless the degree of pessimism that existed at the 1974 bottom was far greater than it is today. To see what a
real downside extreme looks like, let’s compare.
As measured by what? Investor's Intelligence sentiment?Pessimism is a function of price. Period. When all the bad was being put in place during the late '90s there was little pessimism because price was rising. If you want to read the bad go read my comments on NEM thread in early '99. I got nothing but abuse for writing that from all the yahoos, the same ones who now have discovered all the "bad news".
At the 1974 bottom the S&P 500 sold at 7 times earnings;
PEs are a function of interest rates. Rates were 12% then and 2% now. In 1981 the S&P sold at 6.5 times earnings, yet the S&P was higher even though rates were 20%. Absolutely nothing can be read into absolute PEs.
65% of the advisors in the Investor’s Intelligence Survey were bearish;
Sentiment is a trailing function of price. Price trains people to extrapolate the past into the future. That has to be explicitly useless or even damaging.
equity mutual fund cash was 11.7% of assets; and only 4% of stocks were above their 200-day average. Now, that’s what a real downside extreme looks like. By way of contrast the S&P 500 now sells at 43 times earnings; 35% of advisors are bearish; equity mutual fund cash is 5.3% of assets; and 60% of stocks are above their 200-day average.
These figures were a lot worse during the late '90s, so how could the market rise then? What causal connection exists between these numbers and what the stocks you may buy will do? If you believe there is any, you will never take a position in stocks.
On a more anecdotal level, now most investors have held on to their stocks and want to know when to buy more.
You must be kidding. Investor sentiment is worse than I've ever seen it. The public is praying for any rally to sell.
The leading financial magazines feature the stocks to buy in the recovery. In 1974 investors fled the
market in droves and swore they would never buy stocks again, while the periodicals ran articles saying that
the market would not come back for a long time.
They were right. They had to wait for 8 years before a bull trend was again in place. The '74 bottom was garbage and the '75 rally was nothing more than an extended bear market rally just like the advance which started in late '98.
In our view the market remains highly overvalued, and investor capitulation is still ahead. We regard any
rally as yet another opportunity to reduce exposure.
If there ever was a consensus, it is that. How original. How contrary. Must be the prevailing sentiment, but that means the author is in contradiction. |
