Archives for June 2017

Beware the decennial seasonality of Year 7 Summer

Over the last four decades equity market prices have shown a clear and remarkably consistent pattern: from lows established in Year 1 or Year 2 in each of the decades since the 1980s, have risen steady and very profitable bull markets which run into problems that begin in the summer of Year 7.
It was in August 2007 that the first cracks appeared in securities related to the US housing market – BNP Paribas froze dealing in three of their funds which contained packages of sub-prime mortgage loans called CDOs. The next month in the UK, Northern Rock which had been relying for its ongoing liquidity on demand for sales of its securities mortgages saw queues of its savers outside e very branch in a vivid replay of a nineteenth century “bank run”. The next six months saw pressure on any company which had been associated with US mortgage debt – Bear Stearns was bought by J P Morgan, the two major US mortgage providers were put back into government ownership and then Lehmans failed.
It was July 1997 that the Asian financial crisis began when Thailand was unable to ward off speculative attacks on its fixed exchange rate regime had enjoyed rapid domestic demand growth from both companies and consumers who were financed their spending by borrowing in dollars. When the exchange rate link failed, the value of their debts soared leading to a sharp recession and a banking crisis, which spread throughout East Asia. Indonesia, the Philippines, Malaysia and South Korea had similar banking and economic issues. China escaped this crisis and indeed emerged relatively unscathed since the renminbi was a non-convertible currency.
The summer of 1987 saw a major market peak in August 1987, following several years of strong market performance. There was no particular economic or political event that could be said to have been the trigger for the one day fall of 22% in the Dow Jones Index of 22%, other than an increasing realisation that markets were very highly valued. Consequently, many investors had put in place a strategy of “portfolio insurance” which meant that their market exposure was reduced and their positions were sold in response to a market decline. On October 19th this created a wall of continuous selling which pushed the market lower and lower.
The recent very hot weather is a reminder that we are now in the Summer of Year 7 for this decade. There are plenty of candidates for where a new bear market may begin – the consistent upward move from the US stock market in recent years has taken it to valuation levels only seen in 1999, the recent failure of two banks in Italy is a reminder of the weakness of many European banks, in China there has been an extraordinary build-up of domestic debt and the government id desperately trying to maintain its near-fixed link with the US dollar. Or geopolitics may play a part this time – President Trump does not appear afraid to take action against North Korea and tensions in the Middle East between Qatar and the other Gulf nations have recently risen.
History suggests that investors be careful!