Rallies in October from the Past, Present and Future
Despite a dose of reasonably severe buyer’s remorse dampening markets today, the month of October turned out to be a stellar stretch for the bulls.
The thirty bluest American chips, as measured by the Dow Jones Industrial Average, closed up almost 10% for the month, even after today’s 200+-point shellacking. The broader market faired even better with the S&P 500 boasting gains just shy of 11% over the same period. The NASDAQ, not to be outdone, led the three major averages, closing the month out more than 11% higher than where it began.
Any way you slice them, you’re looking at some pretty attractive figures. But what kind of attractive figures are we talking about here?
Are they innocently attractive in the “boy-meets-girl-at-local-fair” way, the kind that leads to blossoming summer romances and that end up in little church-on-the-hill wedding ceremonies? Or are they dangerously attractive in the “married-man-meets-woman-in-hotel-bar” way, the kind that leads to empty, withering marriages and that wind up in costly lawyer’s-office-downtown divorce proceedings?
We don’t know the answer to that, of course. Nobody does. But we do know that chasing seductive stock market tops can be a risky, not to mention costly, business. The same goes for chasing seductive tops in hotel bars.
That’s not to say that all dangerous liaisons must necessarily end in heartache and tears, mind you. Far from it. Sometimes, what looks like a dangerous top turns out, with the benefit of hindsight, to have in fact been a phenomenal bottom.
The last time the S&P 500 turned in such an impressive monthly performance, for example, was back in October of 1974. Most of those hard-won gains were wiped out by Christmas of that year, yes, but the autumnal nadir did prove an important turning point for the markets. Indeed, the Index has never again retreated below its October 4, 1974 reading of 62 points. A decade later it had gone on to more than double, clocking in at 167 points. By October of 1994, twenty years since that epic, late ’74 rally, the S&P was within 35 points of eclipsing 500 for the very first time. And by 2004, even after the fallout from the 2000-2001 tech bubble had erased roughly one third of its value, the S&P 500 stood rather handsomely, above 1,000.
So will the October rally of 2011 mirror the October rally of 1974? Or, more to the point, will the market conditions that prevailed subsequent to the ’74 rally, conditions that allowed for a near 18-fold increase over three decades, visit us again? Tracking a similar trajectory would imply a 2021 S&P 500 reading of about 3,400…and a 2031 reading of roughly 9,500…and an October 31, 2041 close somewhere in the vicinity of 22,200.
Alas, the United States of three-and-a-half decades ago is very different from the United States of today. Bill has written extensively in these pages about how the “average working stiff” hasn’t had a raise — in real, inflation-adjusted terms — since 1974. More and more women entered the workforce, yes, but inflation robbed most of their productive input, leaving medium household income about where it was shortly after Nixon cut the nation’s currency from its golden anchor. At home, American families are today where they were 35 years ago…and working twice as hard to stay there.
And it’s not just domestically where things have gone backwards. There’s also the cost of maintaining the warfare state, a notoriously costly imperial pastime. Aside from the relatively short Persian Gulf War of 1990-91 and a couple of skirmishes in Grenada (1983) and Panama (1989), the US went largely without major armed conflict during the three decades immediately preceding the twenty-first century.
Today, the United States is a decade deep into its invasion of Afghanistan and eight years into its invasion of Iraq, two countries the majority of Americans probably didn’t even know existed in 1974. According to the Center for Defense Information, the estimated cost of these two wars will reach $1.29 trillion by the end of fiscal year 2011. And that’s to say nothing of either the human or geopolitical costs, or of the growing costs related to its various other military entanglements in Pakistan…Libya…Somalia…and “elsewhere.”
And the money to fund all this? Put simply, it’s not there. In 1974, the United States had a gross public debt of roughly $689 billion, equal to around 45% of GDP. This year, gross debt will exceed GDP…somewhere around the $15 trillion mark. Again, most people on the street during the 1970s had probably never even stopped to consider “what comes after a billion.”
Again, your editor has no idea what the S&P 500 reading will be on the close of business three decades from now…or even if the S&P 500 will even exist. Nobody does. But it seems that the United States of 2011 faces stiffer headwinds than did the United States of three and a half decades ago.
Occasionally, with the benefit of hindsight, a risky top does turn out to be a phenomenon bottom in disguise. More often, however, dangerously seductive tops tend to precede the horror of bigger, fatter bottoms still to come.