Boom after a Big Bust:
Reflecting Human Tendency for Hope?
Real Estate Analysis Limited
author is not an expert on stocks or economics and this piece is more an
expression of a hunch than an analysis.
hunch is that?
That the recent strong performances in stock markets worldwide and talks of
recovery, especially with reference to China and the various global
financial measures to keep flooding the markets with liquidity, are LESS a
reaction to good economic or market fundamentals THAN a reflection on the part of
homo sapiens longing for hope (after a disaster) and wanting to believe (or
to participate even if not to believe) in a good story.
strong but still significant evidence:
author has looked back into a few past economic-market disasters and
Hong Kong Hang Seng Index 1986 to current
= 1997 was a big boom year with both real estate and stock markets on a
blazing trail. After the bust, it took more than 7 years before the real
estate staged any noticeable recovery in 2004 yet there was the dot-com / IT
boom led by the USA in 1999 pushing the HSI even higher than its 1997 peak.
Naturally, this IT boom died down eventually and caused another low. This
stock cycle of 97 up-98 down-99up-00 down cycle spread across 4-5 years [see
Note the 1st
up is roughly twice the 1st down.
USA Dow Jones Industrial 1970 to 1980
= for the
younger readers, there was the (first) oil crisis and a global stock market
tumble in the early 1970s. Again, there was a 72 up-74 down- 76 up again- 77
down again cycle, although this time with the 2nd up only
matching (not exceeding) the 1st up and the 2nd down
being not as down as the 1st down. In any event, it was a sharp
recovery after a big bust which is intriguing [see chart 2].
the 1st up is roughly twice that of the 1st down.
USA Down Jones Industrial in the 1980s
= this was this crash in 1987 in part owing to automatic trading. Markets
worldwide were affected but then most recovered quickly. In fact, the DJI
rose to even higher level in 1989 and there was no 2nd down
routine. In fact, it was just the beginning of a relatively long and big
bull run [see chart 3].
Note the DJI
peak in 1987 was 2639 and the corresponding low was 1842 i.e. a drop of
around 30% which is mild compared to any of the foregoing.
your humble author to hypothesize that if the fall is not devastated
sufficiently, the market will not only bounce back sharply and quickly, but
the chance for a 2nd down is slim.
USA Dow Jones Industrial in the late 1920s to the 1930s
= this is of course the famed 1929 Crash and the period of
Great Depression. However, there was not a noticeable up-down-up again-down
again pattern. Instead, there was this grand slide down from a high of 381
in 1929 to a low of 41 in 1932. It took the 1940s-WWII and the first half of
the 1950s to bring the index back to the 1929 level.
when a market really takes a dive, say like this
instance being close to losing 90%, there cannot be a sharp 2nd
up and 2nd down routine as the market may be hurt beyond
we have 3 hypothetical scenarios:
declining only around 30%, perhaps there will be less cause to be concerned too
much [refer to case 3 above]
declining by around 80% to 90%, there is no need to worry because what is
worthy of concern has already happened i.e. no point in worrying
[refer to case 4]
declining by in and around 50%-60%, there is some cause to be worried [refer
to case 1 and 2]
(not even being educated ones), given the current Hang Seng
Index (and that of the DJI too) appears to resemble scenarios A and B more
than the other two (C or D) via losing around half its value more or less
from the last peak, the chance for a 2nd up and 2nd
down seems quite probable.
while the sun still shines but¡K
comments from stocks experts are most welcomed.
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