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Oppenheimer Holdings Inc. Message Board

  • superbmindset superbmindset Oct 10, 2011 1:18 AM Flag

    Does History Rhyme?

    Lately I hear that stock market price trends are repeating 2008 price movements. What better example than this:

    On Oct. 3, 2008 the S&P 500 closed at 1099.23.
    On Oct. 3, 2011 the S&P 500 closed at 1099.23.
    So are we reliving 2008 again and does history rhyme?

    If one holds the belief that the market is efficient, which means that all past historical data and present fundamentals and future expectations are priced into the stock, then one may question what is the point of studying the history of the market such as the one shown above?

    There is a saying however, that history is philosophy teaching by example, and also warning. That, in a nutshell, summarizes why history is relevant. Knowledge of market ups, downs and sideways movements in the past allows the investor to have a perspective of how drastic, or not, market swings can be.

    But if we look at the above example as a “warning” or a “tell” on where the markets are heading then why not further examine long-term historical trends? Why just rely on the short-term outcome of events?

    If you study similar trading patterns of the past then why not examine the outcome of the same exact scenario?

    For instance, there is only one other time where the S&P 500 had the exact same closing price on the exact same day, three years later. That occurred in the three year period between 1967 to 1970:

    On April 10, 1967 the S&P 500 closed at 88.24.
    On April 10, 1970 the S&P 500 closed at 88.24.
    The S&P 500 was still trading at almost the exact range by April 1978! So 8 years after this phenomenon the S&P 500 was unchanged!

    There is one other instance however, where the S&P 500 had the exact same closing price on the exact same day, but it occurred in a two year period. The two year period between 1955 to 1957:

    On September 13, 1955 the S&P 500 closed at 44.80.
    On September 13, 1957 the S&P 500 closed at 44.80.
    And the S&P 500 was trading at 89.38 by September 13, 1965! So 8 years after this phenomenon the S&P 500 had almost doubled!

    So, is history relevant? It is probably one of the most relevant aspects to study and understand but the problems we face are such as the one above: which historical market trends will you further analyze? The months following the phenomenon in the past (1955, 1967 and 2008)? Or the years following the phenomenon in the future (1957, 1970 and 2011)? And if you choose the latter, you still have two options to select from. The 1970’s surely tempers our expectations for the possible underwhelming future trading ranges. But the second example of the early 1960’s draws a much rosier picture of the potential future price movements.

    So although history is a crucial piece of the jigsaw in consolidating one's understanding and also improves our understanding of risk factors involved and giving a more comprehensive idea of fair market levels over time. However, it all depends on one’s perspective and how one interprets historical data points….

 
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