The National Bureau of Economic Research (NBER) determined that a recession began in July of 1981 and ended 16 months later in November of 1982. Along with the recession that book-ended the 1974 stock market collapse this was the longest recession post-World War 2. The current recession began in December of 2007 so it would equal the 16-month duration if it came to an end in April.
The point? The stock market turned higher in August of 1982 three months ahead of the official end of the recession. Although we imagine that the current debacle will set all kinds of records for duration and nastiness our biggest concern is not new lows for the equity markets but rather a rally that we discover some time later is actually a new bull market. Our focus therefore is on trying to figure out exactly where we are in the cycle so that we don’t get peppy too early or remain cautious for too long.
We return to the comparisons between the stock market peak through 2000 and the stock market bottom from 1982. The chart at top right compares General Electric (GE), Cisco (CSCO), and Qualcomm (QCOM) from 1999- 2001 while below right we feature Inco (N), Bank of Montreal (BMO), and Intel (INTC) from 1981 into early 1983.
In hind sight there is often one specific point in time when the broad stock market turns higher or lower but in general a top or a bottom is made through a series of tests and extremes. In other words the peak for the SPX in 2000 was actually a series of internal tops starting at the end of December as QCOM reached a peak and then through the highs for Cisco in March and the final top for GE in late August.
The bottom for the SPX in 1982 began to form in January as Intel made a low and then worked through the cycle bottoms for the banks at the end of the second quarter and then into the lows for the commodity cyclicals in July and August.
In both instances the major trend change from up to down or down to up extended over close to 8 months. As we will show on the next page the process began with a trend change for Treasury prices and then slowly worked through the various markets sectors until the ‘weight’ of the market was finally ready to move in the opposite direction.
Below we show three charts of the sum of the U.S. 30-year T-Bond futures and 3-month eurodollar futures.
Our thought is that it is almost a given that the stock market will turn higher while the U.S. economy is still in recession which means that equity prices will begin to rise in the face of what will undoubtedly be horrible economic news- the proverbial ‘wall of worry’.
On page 1 we showed that the ‘bottom’ in 1982 ran for close to 8 months starting with the lows for Intel and ending with the lows for Inco. The top in 2000, on the other hand, ran for close to 8 months starting with the peak for Qualcomm and ending with the cycle highs for GE.
Our purpose here is to attempt to put this into some form of bond markets context. We are using the sum of long-term and short-term U.S. debt prices as our indicator.
The argument is that back in the early 1980’s the markets were ‘normal’ in the sense that equity bull markets began with falling interest rates (rising bond prices) and ended with rising interest rates. By the late 1990’s the relationship had reversed as, we suspect, the major financials became little more than wild-eyed heavily-leveraged cyclicals. In other words rising bond prices were a positive for the equity markets in 1982 and a negative in 2000. In the current situation bond prices should decline to mark the start of the bottoming process for the equity markets so we have turned the sum of 3-month eurodollar futures and 30-year T-Bond futures upside down on the chart at the bottom of the page.
Where we are going with all of this? We are attempting to show that while the equity markets should be some way along in the process of building a bottom it still appears ‘too early’ for the broad market to do much more than range trade essentially sideways. If history were to be kind enough to repeat… the equity markets still have another three or four months of grinding before the trend will be ready to swing sustainably higher.
We have been looking for lower bond prices and higher yields to confirm that the stock market began to bottom out towards the end of 2008. We suspect that there will be one final bond price rally- likely between March and April- that will fade away below the January highs and go with renewed cyclical asset price weakness. Once the bond market turns lower later this spring, however, our sense is that it will be time to get serious about being positive on the equity markets.