Boom after a Big Bust: Reflecting Human Tendency for Hope?

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

June 2009

First, the disclaimers: your humble author is not an expert on stocks or economics and this piece is more an expression of a hunch than an analysis.

And what 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.

Not extremely strong but still significant evidence: your humble author has looked back into a few past economic-market disasters and observes these:

1)      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 chart 1].

Chart 1

Note the 1^st up is roughly twice the 1^st down.

2)      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 2^nd up only matching (not exceeding) the 1^st up and the 2^nd down being not as down as the 1^st down. In any event, it was a sharp recovery after a big bust which is intriguing [see chart 2].

Chart 2

Note again the 1^st up is roughly twice that of the 1^st down.

3)      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 2^nd down routine. In fact, it was just the beginning of a relatively long and big bull run [see chart 3].

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.  

This prompts 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 2^nd down is slim.  

4)      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.  

Hmm…perhaps when a market really takes a dive, say like this instance being close to losing 90%, there cannot be a sharp 2^nd up and 2^nd down routine as the market may be hurt beyond (immediate) repair.

Summing up, we have 3 hypothetical scenarios: 

i)                    Markets declining only around 30%, perhaps there will be less cause to be concerned too much [refer to case 3 above]

ii)                   Markets 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]

iii)                 Markets declining by in and around 50%-60%, there is some cause to be worried [refer to case 1 and 2]

Simply as guesses (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 2^nd up and 2^nd down seems quite probable.

Make hay while the sun still shines but…

Author’s note: comments from stocks experts are most welcomed.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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