Corrections, complacency and opportunity…

2 mins. to read

Those who do not learn from history are doomed to repeat it” – George Santayana

It does not matter if your investment choices are driven by fundamental or technical factors, you have to respect history.  Take big market corrections.  Societe Generale produced this fascinating chart in the last couple of weeks on the number of days since the last 10% correction in the MSCI World Index. 


Where are we today? 400 days. In today’s markets that is a long time. It is certainly enough time for market participants to shake off the gloom and doom of the global financial crisis and those violent 2007-2012 ‘risk on or risk off’ markets to post some gains and start to feel confident again about the future. I even heard on Wednesday the talking heads on the various financial TV channels mumbling about the ‘first Davos meeting for five years when we have not been focused on a crisis’. With events in the emerging markets, in particular Turkey and Argentina in recent weeks and the global rout on Friday then of course they were tempting fate…

That is the problem with time and the financial markets: people start getting comfortable.  In turn this leads to complacency, inappropriate position selection, risk appraisal and so finally the cycle repeats again and a new crisis is born… Collectively we never learn from history. 

There have been just two occasions in the last twenty years when we have broken through the 400 day barrier. Those of you with 20+ years of market experience will remember well the early 1990s, the ‘green shoots’ of economic recovery and – in hindsight – a five year bull run which ended in 1997-8 with an economic crisis in Asia, a Russian debt default, the failure of the global hedge fund Long Term Capital and Alan Greenspan of the US Federal Reserve slashing interest rates to support the global economy. 

And how about the late 2002-2006 period?  Well, we all know how that ultimately ended.  As I said above, complacency leading inexorably to a crisis. 

The period we should be looking at in the above chart is the one ending in 2000 when the duration length again touched 400 days.  Picking up with Mr Greenspan again of the Federal Reserve, when the global financial markets had worked out that the ‘Greenspan put’ was in place and not going away, optimism swung back and markets rose sharply in a technology boom frenzy throughout 1999… and then hit a brick wall of valuation and fundamental concerns when the new Century started. 

Does any of that sound familiar?  Substitute ‘Greenspan put’ for ‘global QE’ and ‘a technology boom frenzy’ for ‘index fund excitement’ and this shares many similarities with today. That brick wall of valuation and fundamental concerns is out there. 

Predicting with precision a 10% correction is never easy but it is worth remembering one important lesson about successfully investing in the 2000-2 period: there were ways to make money. Back then being short or not holding the excessively pumped-up technology, media or telecoms names was one route. By contrast, tobacco, utility and mining names provided strong upside opportunities.  The themes, sectors and individual stock names will be different but when the 10% correction does come the market will be shaken-up way beyond the headline index levels.  That is an opportunity for the active investor.  

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