Skip to main content

It's not easy to extract meaning from the movements of a pogo stick, which is what the market charts have looked like lately. For a little historical perspective, we talked to

Tim Hayes

, senior equity strategist at

Ned Davis

, an investment research and consulting firm in Nokomis, Fla. The firm's asset allocation reflects its forward-looking worries: 45% stocks, 45% bonds and 10% cash. That compares with a more typical benchmark of 55% stocks, 35% bonds and 10% cash.


Looking into the past, when would you say the macroeconomic situation has been most similar to what you're seeing today?


The important thing to remember is that in the '90s, we really have not seen a major downturn. 1998 was a relatively brief bear market, and in 1994 we had a correction, but it was not lower than 10% at the low point. You have to go back to 1990, which interestingly enough was the last time we had a


in office. We also had oil price pressures, which we're running into today as well. So I'd say the most recent period that had inflationary pressures and economic weakness similar to today would be '90.


Some people have gone so far as to compare the situation over the last few years to the 1920s. You wouldn't go that far?


A lot of people look at the 1989 peak in Japan, the 1929 peak in the U.S. But the problems there were much more severe than we have now. First of all, we didn't have a central bank like we have now. Actually, the '30s created a lot of the safeguards we have today. So the chances of another '30s I don't think are very high. Probably the worst-case scenario would be more on the order of 1974. That was a very major, bad recession, but I don't think the '30s will happen again.


I know you're looking at all kinds of factors when it comes to your economic outlook. What would you say is the most bearish, and what's the most bullish indicator for the economy?


Potentially the most bearish is, we just got data on equity ownership as a percentage of household assets, basically measuring people's exposure to the market. We're at 41% now; it got as high as 43.7% in the first quarter this year. We've come back a little, but it's still relatively high.

The 40-year average

for equities as a percentage of household assets is 24.5%.

For comparison

to now, you have to go all the way back to the '60s. 38% of household assets were in stocks in 1968.

After that high it really began to contract until 1982.

As the economy slows, the bond market should begin to show relative strength and relative safety. The concern is that people will begin to relocate out of stocks altogether, and that will put further selling pressure on the market. It becomes kind of a self-fulfilling prophecy. If people are worried, then they sell, and it doesn't end until it gets to the panic stage. That's when we can start to look for a bottom.

We haven't seen that stage yet, and the potential for it to happen is still in front of us. In some ways it's good that we've had close to a year of market corrections from what had been an overvalued position.


So basically you see broad equity ownership as a bad thing?


Yeah, because it represents the potential for selling. If more and more people see

bad statements, they're not going to put up with it. That can perpetuate the problem, the weakness.


And moving on to a more bullish factor, from what you've written it does seem like valuations are looking better. I'll quote from your report: "One of our most encouraging valuation charts shows that since the market peak in January, when long-term Treasury bonds were yielding twice as much as

S&P 500

operating earnings, the ratio has dropped to 1.4. And when using year-ahead operating earnings estimates, the ratio drops to 1.3, which is right in line with the ratio's 15-year norm."


That's when I said things looked better than they did in January. However, usually these things don't go from overvalued to normally valued. The pendulum usually continues towards the other extreme. I think the risk is that we tend to get undervalued before this process is completed. Given the exposure and relative complacency of investing public now, there's a ways to go.

Abby Joseph Cohen and a lot of people make the fair value argument for being bullish, but I'm not sure that's going to

be enough to do it. I think in a way, we might be about two-thirds into this process.


You've written that it typically takes two interest rates cuts to turn the market around -- that one wouldn't be enough.


I think we need a friendlier


-- not just to go to a neutral bias, but to actually cut interest rates, and not just once but usually

the cuts need to happen twice to really get the market turned around.