EDIT: The original chart contained an error which has been corrected.
Stock Market recoveries following a major downturn are usually characterized by two types of chart patterns, either a “V” or a “W” shaped recovery. A “V” recovery has a single bottom, while a “W” recovery has two bottoms.
Bullish investors think the Market is currently recovering from a “W” double bottom (June & October lows).
I think we’re in a much rarer situation, similar to the distinctive economic circumstances of Post-World War II and the 1970’s Arab Oil Embargo.
Now as then, the global economy is facing much higher than normal geopolitical uncertainty. History isn’t repeating itself, but it is rhyming-
- Post war vs post pandemic
- Energy & trade sanctions
- Proxy wars leading to a prolonged Cold War era
If the Market follows a similar historic pattern, then there is more downside to come.
Note the below chart. During the economic transitions following WWII and the Arab Oil Embargo, a full recovery didn’t materialize for over FIVE years from the cycle peak. Today, we’re only a year from the post-pandemic peak.
Also note, the Arab Oil Embargo resulted in a much more draconian decline…very likely today’s scenario. Coming out of WWII, the global economy was in shambles, but although the USA was debt ridden its economy was intact and it was the supplier to the world. In the 1970’s, USA dominance was being challenged and OPEC cut oil supplies TWICE…1973 & 1979. So far the Europeans have survived the initial shock of energy sanctions against Russia…it’s been a warm winter and they had the opportunity to fill their reserves. But the transition away from cheap Russian energy isn’t over, it’s just begun.
The Ukraine invasion was expected to be short lived (by both Russia & NATO). It was designated a special military operation, before morphing into a war of attrition. The sabotage of the Nord Stream pipeline didn’t occur until 7 months after the invasion. [Curious digression- isn’t it interesting how this terroristic attack on critical international civilian infrastructure hasn’t received more scrutiny.] The Russians are expected to mount a major offensive as the war approaches its first anniversary.
So watch the markets carefully as the events stack up. I suspect the matryoshka will keep getting bigger.
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