You probably have heard of the folklore -- whenever the year ends with 7, the stock market would crash. In 1987, Dow Jones Industrial Average went through the Black Monday in which it crashed 22.6% in a single day on 19 Oct 1987. Stock markets worldwide followed suit. In 1997, Asia went through the Asian Financial Crisis which did not end until nearly 2 years later. The STI went from 2,216.79 on 31 Dec 1996 to 805.04 on 4 Sep 1998, which is a precipitious drop of 64%! Fig. 1 below shows the extent of the crash during that period.
|Fig. 1: STI Crash in 1997|
In 2007, it was US' turn to experience a financial crisis, which eventually inflicted all other countries in the Global Financial Crisis (GFC). The stock market crash did not begin at the start of 2007, but sometime in Oct 2007 and ended only 1.5 years later. From 3,875.77 on 11 Oct 2007, the STI crashed until it bottomed out at 1,456.95 on 9 Mar 2009 for a steep drop of 62%! Fig. 2 below shows the crash during that period. In fact, 3,875.77 remains the all-time high of STI. For the next 10 years afterwards, the STI never came close to reaching this level.
|Fig. 2: STI Crash in 2007|
It is 2017 this year, another year that ends with 7. Will history repeat itself and the stock market experience another spectacular crash again?
Personally, I have experienced the crash of 1987, 1997 and 2007. In 1987, I was helping my father to monitor stock prices when he was at work. On that fateful day (20 Oct 1987), I saw prices gapping down by 33% when the market resumed trading from its lunch break. It was such a shock that it became the moment when I knew that the stock market was destined to be a part of my life (see Confessions of a Serious Investor).
In 1997, I was 1 year away from graduating from university. Being the "smart" guy in the family, I had recommended my father to buy a certain financial stock that had fallen from $3 to $0.75. We never saw the money on this stock again. This crash had the heaviest impact on my family. Because of the financial crisis, Malaysia imposed capital controls, resulting in suspension of trading of all Malaysian stocks listed on the SGX Central Limit Order Book (CLOB) market. All shares were frozen and transferred to the Malaysian stock market. They were only released a few years later. By then, they were mostly worthless.
In 2007, I was investing with my own money for 9 years when the GFC happened. At the start of 2007, I was uneasy with the speculative fever over structured warrants that pushed stock prices to high levels. Unadjusted for corporate actions, Capitaland reached $8.60, Ezra $6.75, NOL $5.45, SGX $15.40, SIA $19.30, Swiber $3.66! Unfortunately, the money that I pulled out from stocks went into REITs and high-yield business/ shipping trusts, such as FirstShip, Rickmers, MacCookPropSec, etc. which crashed equally significantly. At the depth of the crisis, I estimated I was sitting on paper loss of about 65%! Undaunted, I liquidated half of my bank preference shares and pumped fresh money into the stock market. The market recovered and I recouped all my losses and made some money (see Behind Every Successful Bear Market Recovery is A Cash-Like Instrument).
It is 2017, do I believe in the folklore that the market would crash spectacularly again? I respect folklore, especially having gone through 3 severe market crashes previously, but I needed evidence that a crash is likely, such as sky-high stock prices like the case in 2007. Thus, in the later half of 2016, I was wondering what would cause a crash to materialise. The realisation came when the market did not crash after Brexit happened in Jun 2016: the massive liquidity injected by central banks around the world was propping up asset prices, but that did not help the many companies in many industries which are instead facing poor business and/or low margins, with some companies entering judicial management (see What Have We Got After 8 Years of Easy Money?). Although there is euphoria after the US presidential election that Trump would increase infrastructure spending, cut taxes and regulations and thus speed up the recovery of the economy, he is at the same time advocating protectionist trade policies, potentially triggering trade wars with other countries. Furthermore, increased infrastructure spending would lead to inflation and interest rates rising more rapidly. There is also the risk of capital flight out of non-US countries into US, making US dollar debt burdens more heavy for companies in Asia (see Making America Great Again and Its Impact to Asia).
Thus, I am not optimistic about the stock market for 2017 and have been shoring up cash positions whenever possible. The crash may or may not happen. But if it happens, I am prepared.
See related blog posts:
Chin wai, we don't know how it will turn out of your predication of 2017, but i like your recount of the history, if possible, share more posts on 1997, 2007 or your own market experience.ReplyDelete
Noted. You can find snippets of my experience in the following posts:Delete
Confessions of a Serious Investor
Investing Is A Life-Long Learning Journey
Behind Every Successful Bear Market Recovery is A Cash-Like Instrument
Be Cautious While Being Greedy
Thanks for this article ..Helps me to stop pressing the buy button and keeping some cash just in caseReplyDelete