Does History Repeat Itself?

Are our memories really that short; or do we simply believe historical cycles are irrelevant?

Looking at financial markets and economies throughout history, we often feel like we are witnessing déjà vu.

If we went back a century or two and explored the history of financial landscapes, we’d start to notice constant, regular themes in market cycles. The problem is, most of us have trouble remembering today’s date, let alone what we did 10, 30 or 60 years ago. So is there any point in looking at a Dow Jones reference point of 1895? Given that it was 121 years ago, how is it relevant today? I’ll tell you in a moment.

Markets are a bit like movies. There are the classics that are shown ad nauseum, and then there are ‘remakes’ that add a modern twist (think Pride and Prejudice and Zombies). And often, there are sequels—sometimes lots of them—until the story has been ‘done to death’ (you know the ones). Market cycles aren’t much different; there are the strong cycles, there are new trends such as new markets or industry, and sometimes, of course, recessions or crashes come back to haunt us every so often.

A typical business cycle tends to depict an economy slowdown every 7–10 years, and ‘S’ curves that represent innovation trends or new products show up with uncanny regularity, peaking and waning in popularity.

On the other hand, there are seasonal trends such as commodity prices or share market booms and busts. No matter how hard regulators try, they just cannot seem to predict or avert these crashes—they just keep popping up on a regular basis, and have done throughout the history of market economies.

So why do these cycles keep repeating themselves? In my view, it stems from our human DNA; the emotions of fear and greed. So as much as we wish to evolve financially, are we destined to repeat the same mistakes, even if each time the prevailing factors that cause them add them a ‘modern twist’?

A good example is the 2007 sub-prime crisis. Skipping back exactly 100 years, you see the panic of 1907 was all too similar. intriguing that two almost identical crises occurred exactly  Coincidence? Yet although there are similarities in crises such as these, each one has slightly different triggers and unique parameters. It is interesting to note that in response to the 1907 Panic, which had a devastating effect on the banks, the US Federal Reserve System was created to prevent such crises recurring.

I am not saying we can accurately forecast cycles; that would be a crazy claim. If it were possible, then investing (and life in general) would be boring and predictable. Suffice it to say, no-one on the planet has yet proven to have this level of insight. If they did, they would be on the number one spot on Forbes Rich List in no time.

However, markets do provide plenty of unique signposts along the way as we go through life. You just need to keep your eyes open and take an interest in what might lie ahead. Sometimes, economic data or valuations of overall markets can offer clues to possible bumps or dips in the road. Regardless of the signposts, you can be sure that you will never be 100 per cent right every time, so it is wise to tread cautiously with each interpretation.

So, what is the significance of 1895? Well, this is how far you have to go back to find the end of a bull market period that finished in a year ending with 5. If the current bull market finished back in 2015, looking at the overlays, the drop so far seems pretty similar to the one in 1895. 

Is the current bull campaign over? Time will tell! Yet this time for sure, I suspect there will be a different twist on the story that might change the future direction of the share market.

What will happen next? For that, you have to wait for tomorrow. However, you can be sure once the price action completes, it won’t be the end of the world. The equities markets (and life) will go on just as they have for the past 120 years as cycles continue to repeat.

Please also remember that before embarking on any investment decision, you should always seek professional guidance from a licensed financial planner. Of course, I recommend AJ Financial Planning.