Cyclical snakes

The first phase is over. And hopefully it went okay for you.

It was hardly going to go brilliantly, but as long as it didn’t go terribly, then I think that’s okay. Perhaps you did some buying (did anyone buy some oily assets after my article this time last week?), and have made a few small gains around the margin. Or maybe, you sold some positions that got worse, and feel good about it.

Action can be beneficial from a psychological perspective, even if not always from a financial one.

My feeling, as explained last week, is that the virus and the oil stories are behind us. Italy looks to have peaked, for now, going some way to confirming the theories that lockdown measures work with a two- or three-week lag, understandably.

Source: Worldometer

As have Spain, and Germany, though some countries are rising to take their place (Sweden, perhaps, or some developing nations).

Phase one is over. What, now, is phase two?

The first thing to do, as always, is take a breath and figure out where we stand.

American stockmarkets are down a bit, but not loads:

Source: Koyfin

The measure favoured by Warren Buffett, market cap to GDP, is still very high:

Source: GuruFocus

But at 113.8% as of today, it’s still modestly overvalued, though not extremely so, as it was when this decade began.

Importantly though, compared to 2008, the economy is larger (at least, until the virus hit).

Source: Guru Focus

The cyclicality of markets is a timeless phenomenon, and one well worth studying. Howard Marks’ latest book Mastering the Market Cycle is a must-read on this topic. Why? So you can do things like this:

Source: Michael Underhill, on Twitter

It’s important to differentiate between the US and the UK though. Because here the picture is quite different.

We are back to levels seen multiple times in recent decades, on the way up and the way down:

In the UK too, GDP has grown from the 2007 peak of £1,819 billion, to £2,089 million in 2019.

But as you can see, the market doesn’t grow in 1-2% increments alongside GDP. Investors overreact in every direction possible. That’s why cycles look like snakes around a trend line, and always have done:

Source: 25iq

To give that chart some real-world context, how about this beauty from Tavi Costa, a favourite analyst of mine (whose hedge fund is up 40% this year).

Source: Tavi Costa, on Twitter

On a cyclical basis, now looks as good a time as any to be investing in gold and “friends of gold” – silver, miners and the like. If you’re new to the idea of gold being a worthwhile asset to own, then my colleague Eoin Treacy runs a gold stock advisory service, which you can find more about here.

What next?

To sum up, the recent crash was met by a sensible “relief” rally, which luckily didn’t carry on too long.

The markets have calmed down about oil and the pandemic.

Phase one is over.

So, what’s phase two going to be?

A range of options present themselves.

1) This could be like 1987. Rapid crash, a few weeks of breath-catching, and then a slow but steady resumption of the bull market. See the below chart of the FTSE around the time of “Black Monday”.

Source: Koyfin

2) Or, it could be more like 1929, when a rapid brief crash was followed by an enduring depression. See the below chart of the S&P 500 during the Great Depression.

Source: Koyfin

3) Or, of course, it could be somewhere between the two.

It would help to think of the future possibilities as on a bell curve. At one end, you have 1929, while 1987 sits at the other. Two totally opposite directions from here.

But in the middle sits this huge heap of possibilities, which are likelier than either.

My job now, as I see it, is not to tell you which we are going to get. I don’t back myself.

Rather, as the weeks and months go by, it will be my fervent mission to try and figure out which path we are on, as we go along it.

Trying to understand the present is enough of a challenge for me, I’ll leave predicting the future to someone else.

But for me, it’s the most valuable pursuit. It’s the trifecta of investing.

  • A good grounding in history, with an understanding of past cycles, bull markets and crashes
  • An awareness of the variety of possibilities for the future
  • A careful evaluation of the present, within the framework of the first two.

So that’s my mission. It’ll often stray from the main path, seeking opportunities here and there, warning of potential threats or discussing relevant policy, but all with the aim of understanding the present so we can position ourselves for a better future.

I hope you join me, and I really hope that I can provide value. Luckily, in a free newsletter, that’s a helpfully low benchmark.

All the best,

Kit Winder
Investment Research Analyst, UK Uncensored

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