Stock markets have had a great run since October. All the former ‘bubble stock’ favourites – Tesla, ARKK etc – have seen their prices race away. But there are plenty of warning signs to suggest the next phase of the downturn may be about to start:
- As noted here in January last year (The stock market bubble starts to burst), it was clear that a major downturn was about to start
- But as the chart based on legendary investor Bob Farrell’s insights confirm, markets don’t simply move in straight lines
- The move starts with a ‘Sharp Downturn’, but this is usually followed by a ‘Rebound’ before the ‘Drawn-out Downtrend’ starts
This Rebound has been particularly strong, as another famous investor, Jeremy Grantham has noted:
“The important fact here – see Exhibit 1 – is that for 7 months of the Presidential Cycle, from October 1st of the second year (this cycle, 2022) through April 30th of the third year (2023), the returns, since 1932, equal those of the remaining 41 months of the cycle!”
And so the market has staged a terrific rally, and lured back in many people who suddenly saw a chance to recoup their losses.
But nothing lasts forever. And now the support from the Cycle is coming to an end. What happens next?
One answer comes from the Goldman Sachs chart. As they comment:
“Apple and Microsoft currently account for 13.3% of the S&P 500, the most on record. Not since AT&T and IBM in the late ’70s have two stocks been so dominant.”
This is a major red flag as Farrell’s common sense Rule No 7 reminds us:
“Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names”.
WE HAVE REACHED THE “ANGER STAGE” OF ELIZABETH KŰBLER ROSS’ ‘PARADIGM OF LOSS’
Stock markets are also about people and their emotions, as well as about corporate performance.
It has been clear for years that Tesla is never going to achieve global dominance in the auto market. But that hasn’t stopped millions of investors wanting to believe it might happen.
And as noted here in 2020, Elisabeth Kübler-Ross’s ‘Paradigm of Loss’ model is an excellent way of understanding how the crowd’s emotions are playing out:
- As the ‘Sharp Decline’ began, many investors refused to believe it was happening
- ‘Hope springs eternal’ and many investors stayed in ‘Denial’ – and the recent rally has seemed to prove them right
- Central banks had intervened to support markets for the past 20 years, so they assumed this would happen again
But in reality, the issue is much wider than just financial markets. We are actually seeing major Paradigm Shifts taking place in society, alongside the arrival of the 4 Horsemen of the Apocalypse:
- As noted last month, the Financial Crisis forecast here in August has now begun
- And we are still feeling the impact of the other 3 Horsemen – the War, Covid 19 and the growing food crisis
So if markets do now resume their decline, we can expect investors to start becoming angry, in line with Kübler-Ross’s Paradigm. But then the market will start to adjust to the New Normal:
- Companies will be forced to sell assets, individuals will have to stop borrowing and start saving
- Then the ‘Depression’ stage will begin, as everyone realises how much they have lost
But out of this Depression will come ‘Acceptance’. And major new Opportunities will emerge to carry society forward into the New Normal.
Time spent on researching these Paradigm Shifts today, will prove very profitable for the future.