The current market environment somewhat mimics the 1981 market:
Why?
The stock market rallied 31% from Nov 1979 to Nov 1980 on the optimism that Reagan would revolutionize the economy.
The Reagan Revolution led to the Tax Cuts entitled "Economic Recovery Tax Act of 1981, An act to amend the Internal Revenue Code of 1954 to encourage economic growth through reduction of the tax rates for individual taxpayers, acceleration of the capital cost recovery of investment in plant, equipment, and real property, and incentives for savings, and for other purposes. " (source: Wikipedia)
"Included in the act was an across-the-board decrease in the marginal income tax rates in the United States by 25% over three years, with the top rate falling from 70% to 50% and the bottom rate dropping from 14% to 11%. This act slashed estate taxes and trimmed taxes paid by business corporations by $150 billion over a five-year period. Additionally the tax rates were indexed for inflation, though the indexing was delayed until 1985. The act was signed into law on August 13, 1981" (source: Wikipedia)
In the current scenario of January 2018, the market has rallied 31% from November 2016 to November 2017 when a very similar tax law was passed, cutting taxes to individuals and to corporations while incentivizing business spending through accelerated depreciation deductions. Since inflation was so high back in 1981, tax "bracket-creep" was the main concern and was also a part of the tax relief, but it took years of MASSIVE, PAINFUL INFLATION which jacked up people's incomes by 100% nominally over the previous 10 years but up ZERO on a real basis, so higher tax rates slammed down "real wages" which was killing the economy.
I have noted a number of major stories of the time to give some color on what was happening and once again thanks to Wikipedia for the main points and descriptions.
Normally I would go to the library and use the NY Times microfiche and review the news for the year to find these important tidbits, which takes hours of my time. But now, it only took an hour of my time to collect, arrange and publish this useful "HEADS UP MARKET TOP" piece about how the current market is similar to the "STOCK MARKET TOP OF 1981".
My "forecast for the year 2018" is still in production, but had to get this useful info-graphic out to you right now.
Wishing you all health and happiness in the year 2018.
Tim West
Moderator of Key Hidden Levels Chat Room - Right here at TRADINGVIEW.com
Come join us.
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I lived through this time frame and was paying attention to the markets since inflation was crazy back then and interest rates were soaring. The Rolling Stones wrote a song about it called "Shattered" (lyrics: "the prime rate's going up, up, up, up, UP! To live in this town."). I could add so much more to this chart but it has enough on it already.
As anticipation of your 2018 forecast I would like to pose this question: if you expect a stock market correction, where do you think the money will flow into? Gold, bonds and possibly crypto-currency? This last aspect is a new important factor not to be excluded. :)
timwest
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@lencanoot, I appreciate the question.
UnknownUnicorn1020621
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Thank you! I just posted your idea on my similar idea.
hankchef
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Thank you @timwest the interesting charts and recap of the stories, Mean reversion is so phenomenal that no market can avoid it. It took about 1.5 years for the correction (or Regression to the mean) to complete in 1981, if similar, it will be so boring for the long bear market to come in 2018 and 2019. What can we do to prepare for the drop then?
AlbertCheng
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Tim, I heard that after tax cut Trump administration will stimulate the economy by investing heavily in United States infrastructure. While I don't know whether Reagan's administration did similar thing, will the infrastructure investment help United states economy keep expanding and therefore support the stock market rising?
timwest
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@AlbertCheng, The Gov't might have a tough time passing the 'fiscal stimulus spending plan', but if it passes, I believe that it will be more negative than positive because of the new debt that will be added to the $20 trillion balance. Time will tell. The solar + battery storage + Electric Vehicle revolution + superchargers is an economic driver (but also an economic destroyer of Internal Combustion). Let's keep posted as the 'spending plan' gets worked out. Also, "The Wall" is a great waste of capital, time and resources and sends the wrong message to the world, so if that "Wall" gets tabled and pushed aside, that will be a slight positive.
qianniu2012
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Hi, Tim, I actually like the time mode count used by you previously. I can understand that you are trying to compare this time's tax cut comparing with previous one. But to my eyes the chart at that time is not very similar with current one. I would like to know your conclusion if you only consider the mode
timwest
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@qianniu2012, Thanks for your comments. The price pattern is simply a 31% price rally into a Tax Cut change. The change in the current tax law is almost identical to the change in 1981. The market rallies into the news. Of course these aren't exactly the same "market structures" (as in "time @ mode" analysis). For example, before the market pulled back in 1981 it had already failed to make a new high for 5 months. Most people that I have seen commenting on similarities missed the important points that I posted in this analysis. So, hopefully, people can keep an open mind and look for the patterns. For example: AIDS was just discovered back in 1981 and that certainly put a level of fear in everyone.
JordanFreeman
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I wish i can say i can short with this unbeilevalbe historic pattern here but i don't know that there is even any short sellers left in the market for this correction to happen at this point in time.. I personally believe you would definitely need to give this alot of time to play out.. As you said time has expired for different timeframes back in november and october.. thats crazy.. Ever think about playing bonds for a steepening in the yield curve.. a pairs trade of the sorts.
timwest
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@JordanFreeman, You don't need short sellers for a market to go down. All you need is a lack of buying and marginal selling. People have been holding off selling hoping for lower tax rates and now that they are only a little lower, they may be ready to take some profits.