By Peter Tchir of Academy Securities
If you were hoping for a review of Cheech & Chong movies, you will be sorely disappointed. With the S&P 500 breaching 5,000 and setting all-time highs, it seemed like a good time to do a retrospective of all-time highs. At least those that I remember, so we only have to go back to the 1980s.
One Thing That I am Certain of Regarding All-Time Highs
We will all get sick of hearing about “all-time” highs. Yes, if the S&P 500 goes up a measly 1 point on Monday, we will have a “new” all-time high. Every dip that gets bought will create “new” all-time highs. We will probably all get sick of being told about “intraday” versus “closing” all-time highs. 5,100 on the S&P 500 will be cause for “wild celebration” in the media, despite it “only” being 1.5% away (which could easily happen in a day at its current pace).
All that “all-time” high chatter (and cheerleading) will be a distraction from our real jobs – figuring out where the market is headed next. Which is why I think that a “retrospective” would be interesting and potentially useful.
All Sorts of Things Happen Around All-Time Highs
Let’s start with a quick “synopsis” of what has happened since 1980. I probably should have used a log chart or something to dampen recent moves relative to prior moves. However, since I went down this path, I didn’t feel like going back and think that it is quite effective in illustrating some points.
There are a few things that stick out to me:
- We tend to get long periods of relatively steady uptrends. I guess that is common sense since we started in 1980 at 115 and are now at 5,027.
- It is easier to put labels on the “bad” moments rather than the “good” moments. Again, in part, this is because going up is much more common.
- It was easier, at least for me, to put labels on more recent moves rather than historical moves, as my recollection is better and I was much more directly involved.
- On one hand, even adjusting for scale over time, some things that seemed “critical” at the time were mere blips in the grand scheme of things. On the other hand, what seemed like nice long-term trends often had periods of volatility in both directions. The “tech bubble” bursting had several tremendous reversals.
- While some of the labels might be accurate overall, they don’t do justice to the complexities of each event. During what is commonly referred to as the “tech bubble” bursting, the world had to deal with the tragic attacks on 9/11 and the aftermath.
Let’s examine a few of these in more detail to see what we can learn.
The Crash of 1987
Portfolio “hedging,” where managers tried to dynamically manage their portfolio rather than buying options, allegedly contributed to what (at the time) was called “Black Monday.”
In a matter of days, the stock market gave up about 18 months of gains. While I’ve drawn a trendline from September 1986 to October 1987, there were some meaningful pullbacks. In hindsight, was that first 5% “dip” a warning sign or a precursor of what was to come? Or was it just noise like previous dips? While we bounced on efforts to “solve” the issue (with massive liquidity, though long before QE was a household term), I didn’t realize that we dropped more than 10% from there as we headed into November and early December. A further 10% decline would be memorable in most situations, but that brief sell-off was so large that everything else was forgotten (at least by me).
The Greenspan Put
While the “Greenspan Put” started in 1987, it seemed like a reasonable response to a set of circumstances that had exposed flaws in market structure. 1998 seemed different to me. Yes, Russia was teetering on default. Yes, Long-Term Capital (the “smartest people in the room”) was apparently threatening to bring down Wall Street. This included massive bets, unheard of at the time, on esoteric instruments that were moving several standard deviations and wreaking havoc with collateral management. But were they really “systemic?” Did the Fed really need to intervene as aggressively as it did not just on monetary policy, but also by “encouraging” (and I use that term very loosely) the banks to cooperate in previously unheard-of ways? This one was near and dear to my heart as I was directly involved. One lesson that I learned from this, which only became apparent as the GFC unfolded, is that if you are a CEO of an entity and asked by the Fed to help, you sure as heck better help! (See Bear Stearns and Lehman Brothers).
The Greenspan Put, maybe because it was “unnecessary” or certainly not as necessary as it was in 1987, helped stocks recover their losses very quickly and we moved to new highs!
The "Tech Bubble"
First, what was commonly referred to as a “tech bubble” at the time, merely looks like a moderate misalignment of capital in retrospect. While some companies never grew into their valuations and never returned, several of today’s market leaders look “dirt cheap” now even at levels that were then considered “bubbles.” The data has pointed to a resilient consumer. I’ve been skeptical of how strong the consumer will be going forward. My impression, albeit subjective, is that discounts were very prevalent during this holiday season (pulling future demand forward) and inflation continued to skew spending higher (as we still have to spend more to get the same amount of stuff). While that might have been a sufficient argument a few weeks ago, we need to dig deeper. Some of the high yield issuers (I was more involved with them) wound up defaulting but came roaring back over time. I still have “fond” memories of AOL being acquired and a lot of specific CDS related questions about dilution not having to get resolved. But I digress.
You can see 9/11 in the chart. What I don’t highlight, which I think is a problem when we discuss the period, was the failing of WorldCom and Enron. Two “allegedly” investment grade companies went “poof” relatively quickly. How could analysts do their jobs when the data was misleading or outright fraudulent? I strongly believe that the concern those two bankruptcies caused for credit markets played a great role in not just the depth of the problem, but also why it took well over 5 years to recover!
It will forever be known as a “tech bubble” but I think that is a misnomer and too simplistic.
What you can see from the chart is that it was a “great” period for traders, if you caught some of the moves correctly, or it was one of the few times that “buy the dip” failed, repeatedly.
Yes, the “bubble burst” but there were multiple moves higher of 10% or more, and remember, this is the S&P 500, not the Nasdaq, which had even “crazier” moves.
The 2007 “All-Time” High
Of all the all-time highs, this is the one that I’m most bitter about, and it seems bizarre in almost every respect.
I jammed a lot into this chart. I feel obligated to highlight my “frustration” with Michael Lewis’s book “The Big Short.” It makes it sound like only a select few saw housing start to crack. From my seat, many people saw it, but the timing was incredibly difficult, and you were certainly “fighting the Fed.”
We “finally” got back to the “tech bubble” highs in the summer of 2007. It was helped by housing, but also incredibly tight credit spreads, as products like CPDOs seemed “miraculous” in that you could take BBB credits, leverage them in a vehicle, and get a AAA rating (flawed). This was coupled with everything that went on in the mortgage-backed market (where issues with the original tranching models were multiplied when tranches were re-tranched into CDO squared).
But it was the “Bernanke Put” that strikes me as the most odd. The all-time highs in stocks were set after some serious problems had been exposed. But the measures Bernanke took (from monetary policy to the media) helped us reach new highs. Then, while we tried to bounce every time the Fed (or D.C.) intervened, we continued to slide. We didn’t bottom until March of 2009, a full 6 months after Lehman defaulted. I still think that the Lehman Moment is the greatest misnomer in financial markets as stocks rallied that week and there were far more problems (many greater than this). But maybe a “scapegoat” helps everyone feel better?
But, to this day, I still do not understand how the Bernanke Put, which came shortly after all-time highs were breached, could overcome all of the obvious problems.
Having said that, I did learn the hard way that you don’t need to understand something to trade it, which came in very handy, most recently during COVID.
More “at the highs” Thoughts
Almost all are surrounded by frantic volatility, especially after they fail.
It is almost disturbing (actually I find it quite disturbing) how many highs seem dependent on monetary policy, which may explain why the uptrends and downswings both seem more manic.
Brexit, which caused markets to trade limit down after the surprise vote, was “solved” by the time markets opened for business with central banks providing “globally coordinated” support. Ditto for the 2023 “banking crisis.” This was the first time that I was asked to participate in a “crisis” special – which was an obvious buy signal. 😊
We’ve all lived through the past few years, so no reason to expound on them anymore, other than that they too seem to fit the patterns of the past.
Bottom Line
Could this be just the start of breaking through to higher and higher highs?
- If AI is passing on cost/benefit analysis already, then it is certainly a real possibility!
- As supply chains shift and we redevelop a strong “working class” in America, where jobs are more secure and higher paying, then it is certainly a real possibility.
- If the Fed cuts and forces “savers” back into equities on anything like the scale that occurred during ZIRP, then it is a real possibility.
On the other hand, if all we have done is chase monetary policy to levels that aren’t currently sustainable through innovation, jobs, and real economic growth, then the decline is likely to be rapid and leave a lot of people scratching their heads and wondering how it was possible to sell off so quickly (even though historically, that is the “norm”).
I guess that if I was writing to Ann Landers, this is where I’d sign the report “torn and confused.”
I remain resolute on higher yields and tighter credit spreads, but I am truly struggling with what to do with stocks here, except to add to commodity related holdings and wait to see how commercial real estate does.
Good luck, enjoy the Super Bowl, and take the over on the number of times Taylor Swift is mentioned!
