Why This Time Is Different

• Posted by Greg Harmon
• on December 5th, 2014

It is a popular concept that history repeats itself. This adage can be applied to all aspects of life. But it is almost as common to hear the phrase ‘this time is different’. Most often there is some small nuance that drives this distinction and leads the speaker to utter what turns out to be completely wrong. So with that risk at hand I venture to state that this time is different. I use this to describe the broad stock market and the risk of a crash after a 6 year run higher. Let me give you a few examples.

The chart above shows the CRB Index over the last 20 years. Over that timeframe the stock market experienced 3 major moves higher including the current move. The first two were followed by sell offs. One driven by the bursting of the tech bubble and irrational investment in businesses without any model much less revenue or profits. That was 2001 to 2003. The second is more interesting in that the run higher in the market happened as inflation was igniting, consuming resources and raising costs. This bubble burst as credit evaporated and led to the 2008 financial crisis.

So why is this time different? The resource pressures are not even beginning to emerge and in fact with oil and other prices dropping the profitability and cost structure of businesses is improving. No price pressures, and even a tailwind. And real companies making profits. So what if it has been 6 years? There is no rule that it cannot go on for another 6 years.

 

 

Another concern has been that small caps are not leading the market higher. They are up only 1% year to date as measured by the Russell 2000 where the S&P 500 is up 12%. How can the market continue when the small caps are doing poorly. It turns out that over the life of the Russell 2000 there have been 5 instances when the Russell 2000 has turned in a negative year while the S&P 500 was positive. As shown in the table, each time, except for the financial crisis in 2007, both the S&P 500 and the Russell 2000 were up big the following year.

Will this be the fifth time that both indexes rage higher in 2015? It might be. Nothing is guaranteed in the stock market. But it is just lazy to assume that history will repeat the same way as in the past with an ever changing world. Don’t be lazy. Watch the price action for clues as to what may happen. And then act.

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