Fisher Investments Editorial Staff
Forecasting, Market Cycles

Days of Future Past

By, 12/09/2008

Story Highlights:

  • This year's stock market panic, like all other periods in the history of markets, is in some ways unique and others archetypal.
  • Investing is a business of probabilities, not certainties, and studying history is the only rational way we can begin to assess reasonable probabilities for the future.
  • Market history can be used as a starting point to frame expectations about the future, because there are general patterns and characteristics that repeat.

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This year's stock market panic, like all other periods in the history of markets, is in some ways unique and others archetypal. Many events characterizing this period were unprecedented, a few even previously unimaginable. Such transformations and turmoil make the future ahead harder to assess but not impossible—with the help of history.

 It may seem counterintuitive to look backwards to form future expectations. But investing is a business of probabilities, not of certainties. Studying history is the only rational way we can begin to assess reasonable probabilities for the future. Said another way, without history, we are left with a blank page from which to formulate probabilities—an intuitively irrational start.

An analysis of market history can be used to frame assumptions and expectations about the future—giving us context and structure. Many general patterns and characteristics repeat, because there are fundamental factors that are largely resolute (ex. the law of supply and demand, human behavior, etc.). Much like ocean waves are underpinned by the same elements—water, wind, and current—though each wave's rise, formation, and crash is unique. Recognizing and understanding these basic elements then provides a baseline from which to formulate reasonable expectations.

So, what future expectations should we now hold based on history? History shows stocks always rebound before economic data improves, because markets discount future economic activity far into the future. Stock markets bottom while economic recessions seem to get worse, and so we shouldn't take worsening economic data to formulate expectations. History also shows in periods of panic, markets are driven downward exclusively by non-fundamental pressures, only to act as a spring during the initial recovery stages. At some point, buyers will quickly overwhelm sellers and stocks will move higher in a swift, steep ascent from the bottom—providing some of the biggest gains of a market cycle. Investors wanting to reap these gains should position portfolios to benefit from a rising market in the period ahead. We also recognize, though it's impossible to time a bear market bottom exactly, history shows this bear is already larger than average in magnitude and average in duration—making a recovery sometime in the near future increasingly probable.

Of course, investors can't forecast the future by relying solely on history—it's merely a starting point. Conclusions drawn from economic and finance theory, shaded with assessments of new and unique factors relevant to the present can help complete the picture and provide for rational decisions. Still, it's important to remember investing is about probabilities. Investors can only hope to form reasonable expectations and assumptions of what might happen in the future. With that, it's impossible not to be exposed to some uncertainties, but then again, that's the name of the business.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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