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Moneycontrol Pro Weekender | History lessons

Why do investors turn to history when the chips are down, but ignore it resolutely during bull markets?

May 28, 2022 / 09:29 AM IST
In 2020, when the markets plunged, it took only a few months to get back to former highs, but after the dotcom crash it took more than four years for the Sensex to get back to the heights it scaled in January 2000.

In 2020, when the markets plunged, it took only a few months to get back to former highs, but after the dotcom crash it took more than four years for the Sensex to get back to the heights it scaled in January 2000.


Dear Reader, 


Can history be a signpost to the future? Why do investors turn to history when the chips are down, but ignore it resolutely during bull markets? Perhaps it’s just an attempt to find out when the bad times will end and our investments will once again be profitable. During bull runs, of course, nobody is particularly interested to find out when the good times will end.


Market mavens have been busy looking to the history of stock markets to gauge the average length of bear markets and how long it takes for the indices to return to the peaks scaled earlier. Ajay Bagga points out that in the US, bear markets since 1928 have lasted on an average 289 days, or 9.6 months.


Howard Marks, in his recent memo, titled ‘Bull Market Rhymes’, approvingly quotes Mark Twain: ‘History doesn’t repeat itself, but it does rhyme.’ He then goes into a deep dive into the history of bull markets, although to be fair his memo is more about psychology than about numbers.


But does an average really make sense? In 2020, when the markets plunged, it took only a few months to get back to former highs, but after the dotcom crash it took more than four years for the Sensex to get back to the heights it scaled in January 2000.

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Moreover, the current environment is hardly an average one. When was the last time that global debt was so high, central bank policy rates were this low, liquidity so abundant? When was the last time, after hyper-globalisation started in the nineties, that we had such a massive disruption in supply chains? When was the last time we had a pandemic? Had large swathes of the world’s second largest economy been shut down before? And that’s leaving aside geopolitics, trade wars, punitive sanctions which are at present hurting the developing world more than Russia, de-globalisation and disruptive climate change.


There’s one more factor---unlike earlier market downturns, central banks cannot go in for quantitative easing because inflation is already high. Nor, with fiscal deficits at record highs, is there scope for government spending to boost growth. And far from China being the engine of a global recovery, this time it may well be the epicentre of a new bear market. Finally, it’s worth recalling that Herodotus, who is known as the Father of History, is also called the Father of Lies.


There are other ways of reading the tea leaves. Rather than looking back at past cycles, MC Pro columnist Ananya Roy looked at the difference between US and Indian 10-year bond yields to predict when FII selling will abate. My colleague Sachin Pal looked at the technical picture for copper, (aka Dr Copper because the metal has its finger on the pulse of global economic growth), to decipher clues about the equity markets.


Ruchir Sharma says in this FT article, free to read for MC Pro subscribers, that private markets may be where the next crisis may rise. In India, the disjuncture between private and public market valuations has been hammered home by Paytm.


In these troubled times, geopolitics has become essential reading for investors and the Ukraine war loomed large over the World Economic Forum meet at Davos. We had articles on the launch of the Indo-Pacific Framework for Prosperity, the real reason for the Quad and the problems facing China.


On Thursday, the US markets took solace from the Fed minutes, with reports of insiders buying the dip. The Chinese authorities too have announced a series of measures to support growth. The key thing to watch for is whether growth is softening sufficiently to lower inflation. The Flash PMIs for the developed economies show growth slowing, but inflation remains very strong.


For India, our Economic Recovery Tracker shows most weekly indicators in the red, but only mildly. Sanjeev Aggarwal, CFO of JK Tyre, says there’s still a large under-recovery of cost increases. We now have a two-pronged effort to pull down inflation, with RBI hiking rates to restrict demand while the central government is reducing taxes and duties and trying to fix the supply side. The impact on exports though is likely to be negative and such knee-jerk policy reversals could lead to lower capital investment as well as lower valuations.


This is a stockpicker’s market. The spate of corporate results continued unabated and our research team burnt the midnight oil to analyse them. I’ve divided the stocks/companies covered in several broad categories below.


Industries affected by the fight against inflation:


Steel 


Textiles


Sugar


Stocks that cater to bare necessities:


Page Industries


Dollar Industries and Rupa Company


Aditya Birla Fashion & Retail


Stocks for the opening up of the economy:


InterGlobe Aviation


Stocks that have already gone up quite a bit:


Easy Trip Planners


Hindustan Aeronautics


Stocks that have corrected a lot:


Hindalco


Paytm


Dividend yield stocks:


Power Grid


NTPC


NTPC once more


Those affected by the slowdown:


IT stocks


Zee Entertainment


Stocks with pricing power:


Divi’s Labs


Stocks with a regulatory moat:


MapmyIndia


Stocks with undemanding valuations:


Ashok Leyland


Zydus Lifesciences


Karur Vysya Bank


Amara Raj and Exide


Control Print


And those I don’t know how to fit in:


Dodla Dairy


Aether IPO


Concor


Goldiam International


Incidentally, falling markets may also be an opportunity—short sellers in tech stocks, for example, are laughing all the way to the bank.


We had our regular offerings, including Crypto ConversationsTech MantraStart-Up Street and the final instalment of our Decoding PLI series. We also wrote on the excitement, perhaps unintentional, caused by the Supreme Court ruling on GST, on Hong Kong’s Metaverse index, on the end of the good times for gold lenders and on the one chart that shows the Modi government’s performance over the last eight years. And we also had a far out piece, perhaps the first time that anyone has compared the investment process to colouring hair.


Our Strategy Lab, which back-tests strategies sent in by our readers, is of course another example of trying to learn from history. But as they say, past performance is no guarantee of future returns.


Henry Ford put it much more bluntly when he said, ‘History is more or less bunk.’


Cheers,

Manas Chakravarty

Manas Chakravarty
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