If there’s anything we’ve learned about these markets over the last
several years, it’s that they’re capable of anything. We’ve also learned
to expect a dramatic move when one would least expect it. Yesterday’s
reversal was about as indiscriminate as anything we’ve seen since just
before the election, and it came at a time very few expected it.
However, if you follow the markets daily activity as closely as we
do, then you’ve probably come to learn these markets have had a very
consistent habit of breaking down on new highs, but which new highs has
always been the question. Truth is, sometimes these markets have broken
down on new highs and sometimes they haven’t, but one thing’s for sure –
when they have reversed themselves sharply, it has usually always come
when the bulls start to get a little too giddy.
Recently investors have been asking about the potential for a major market pitfall based on the Year Seven Phenomenon. This refers to the historical tendency of stocks to experience a significant setback in the seventh year of the decade.
Let’s look back at the long-term track record of the years ending in 7, starting with 1887. There were above-normal market pullbacks in each of the following years: 1887, 1897, 1907, 1917, 1937, 1957, 1977, 1987, 1997, and 2007. The tendency in most of these years was for the market to witness most of its losses in the third or fourth quarters.
Not all of those volatile years witnessed a net loss, however. It may surprise you that the notorious market crash of 1987 didn’t completely erase the gains for that year. Nor did 2007, the prelude to the 2008 credit crash, end on a negative note (the Dow in fact gained 750 points that year). Other years falling under the sway of the Year Seven Phenomenon witnessed impressive gains despite temporary setbacks in the third quarter of the year. Examples include 1997 and 1967.
All of this is to say that even the most reliable of historical patterns should be taken with a large grain of salt. Investors should be careful about assuming the worst case scenario for 2017, even in light of the stock market’s recent internal weakness. While a deeper market decline is certainly possible before the summer is over, the factors which historically contribute to major panics – investor exuberance (1987 & 1997), financial sector instability (1907 & 2007) – aren’t currently present. The odds are therefore against a panic decline this summer.
More importantly, whatever weakness the broad market may experience between now and October should lead to another ideal buying opportunity. With the market fairly valued, the economy steadily growing, and the financial sector firm, there is no reason to assume that temporary weakness will lead to anything other than an internal cleansing of a still-healthy bull. Conversely, should these markets simply continue lower, we’re clearly not going to want to step in the way until they’ve achieved what we believe to be a key technical bottom.
Recently investors have been asking about the potential for a major market pitfall based on the Year Seven Phenomenon. This refers to the historical tendency of stocks to experience a significant setback in the seventh year of the decade.
Let’s look back at the long-term track record of the years ending in 7, starting with 1887. There were above-normal market pullbacks in each of the following years: 1887, 1897, 1907, 1917, 1937, 1957, 1977, 1987, 1997, and 2007. The tendency in most of these years was for the market to witness most of its losses in the third or fourth quarters.
Not all of those volatile years witnessed a net loss, however. It may surprise you that the notorious market crash of 1987 didn’t completely erase the gains for that year. Nor did 2007, the prelude to the 2008 credit crash, end on a negative note (the Dow in fact gained 750 points that year). Other years falling under the sway of the Year Seven Phenomenon witnessed impressive gains despite temporary setbacks in the third quarter of the year. Examples include 1997 and 1967.
All of this is to say that even the most reliable of historical patterns should be taken with a large grain of salt. Investors should be careful about assuming the worst case scenario for 2017, even in light of the stock market’s recent internal weakness. While a deeper market decline is certainly possible before the summer is over, the factors which historically contribute to major panics – investor exuberance (1987 & 1997), financial sector instability (1907 & 2007) – aren’t currently present. The odds are therefore against a panic decline this summer.
More importantly, whatever weakness the broad market may experience between now and October should lead to another ideal buying opportunity. With the market fairly valued, the economy steadily growing, and the financial sector firm, there is no reason to assume that temporary weakness will lead to anything other than an internal cleansing of a still-healthy bull. Conversely, should these markets simply continue lower, we’re clearly not going to want to step in the way until they’ve achieved what we believe to be a key technical bottom.
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