Sir Isaac Newton's South Sea Bubble Nightmare

In 1720 Isaac Newton had the good fortune to invest early in the South Sea Bubble, making a quick and decent profit. Satisfied with his gains, he exited before the bubble fully inflated. However, as he saw his friends amass incredible wealth, he couldn't resist re-entering the market. In an attempt to make up for lost time, he invested far more—some of it borrowed—and, unfortunately, bought in just before the bubble burst. As the stock plummeted, he lost almost everything, with his investment returning to roughly the value of his initial, smaller stake. It's said that Newton, reflecting on his experience, remarked, "I can calculate the movement of heavenly bodies but not the madness of men."

 

» There is nothing so disturbing to one's well-being and judgment as to see a friend get rich. « 

– Charles P. Kindleberger

 

Sir Isaac reportedly lost the equivalent of $4 to $5 million today, which amounted to almost the entirety of his investment in the South Sea Company. While this was a huge blow to his wealth, it did not leave him destitute, and he still maintained a fortune, though his stake in the company was essentially wiped out, losing around 90% of its value.

Presidential Cycle Effects with a New President | Tom McClellan

The Presidential Cycle Pattern suggests that the stock market tends to follow similar patterns during the same points in prior presidential terms. The Presidential Cycle Pattern is calculated by averaging the S&P 500 performance over 4-year chunks. Variations can include factors like whether the president is a first-term or incumbent. 

 

  1st Term Presidential Cycle Pattern November 2024 - January 2026

The chart above compares the stock market performance under new presidents versus incumbents. The green line represents new presidents, while incumbent presidents tend to have a more stable market, especially in the first year of their second term, due to a stronger economy heading into reelection. New presidents often spend their first two years facing crises inherited from their predecessors, which can dampen investor sentiment. Incumbents, by contrast, don’t typically blame the previous administration and tend to have better market conditions in their second term.

There’s also a difference in stock market behavior after an election. When a new party wins, Wall Street initially celebrates, but the enthusiasm often fades when the new president faces the reality of governing, particularly in dealing with Congress. In 2020, the market behaved differently due to massive Fed intervention, with QE4 pumping $1 trillion per month. However, this was reversed in 2022 with quantitative tightening.

  1st Term Presidential Cycle Pattern November 2024 - November 2028

By the third year of a presidential term, stock market trends tend to be positive, with few exceptions like 1931 and 1939. By the election year, early performance differences between first and second term presidents are generally evened out. 

 

Looking ahead to Trump’s presidency, the market may initially react positively to expectations of tax cuts, deregulation, and government efficiency. However, if his policies lead to a balanced budget, historically, that could be bearish for the stock market.

 

Reference:
Tom McClellan (December 05, 2024) - Presidential Cycle Effects with a New President.

 

 

 

 

DJIA and S&P Bullish Into Year-End, with Bouts of Profit Taking | Day Hagan

In the Dow Jones Industrial Average (DJIA) and S&P 500, near-term resistance exists within bullish price channels, as negative A/D Line divergences are resolved. The bulls remain in control, but we are watching for signs that the post-election market action signals the beginning of a transition to a choppier 2025. Large-, mid-, and small-cap proxies didn’t come close to filling the upside gap created by the election results, nor did they break below their recent topside breakout ranges and levels. I view this as supportive (bullish) in the near term. It also suggests that the recent low serves as the first level of short-term support.

DJIA and S&P 500 (daily bars). Short-term resistance is still in place. When coupled 

with high levels of “Excessive Optimism”, bouts of profit-taking shouldn’t be surprising. Mind the gaps.

Have equities brought forward the historically bullish returns of the fourth quarter following elections? Are we at risk of such an occurrence? While I still believe there will be instances of profit-taking as we approach year-end, I consider seasonal charts to be secondary; they are not as significant as primary indicators and models.

The Dow Industrials' Four-Year Presidential Cycle suggests a choppy start to 2025, with weakness in the latter part of the 

first presidential year extending into the second year—an outlook that has not been widely discussed on Wall Street.

 

The bull market typically continues into the first year after an election, but the first two years tend to be rocky. Many bear markets begin in the first year and persist into the midterm election year, as seen with the bear market that started in 2021 and continued into 2022. Therefore, looking ahead, prudence suggests adopting an investment strategy that objectively manages risk.

Reference:
Day Hagan (November 27, 2024) - Bullish into Year-End with Bouts of Profit Taking.

 

The typical December Seasonal Pattern starts off dull and pops mid-month.

Two Years of +20% Gains for the S&P 500: What's Next? │ Michael Hartnett

Michael Hartnett, Chief Investment Strategist at Bank of America, notes that the S&P 500 is on track for a +20% return in two consecutive years. This has occurred only four times in the past 150 years: 1927/28, 1935/36, 1954/55, and 1995/96. 

 

Historical analysis of returns in the following two years reveals two key insights:

1. The S&P 500 is likely to experience another significant double-digit move in 2025.
2. Falling bond yields may serve as the "secret sauce" that helps the S&P 500 avoid the substantial reversals seen in 1929/30, 1937/38, and 1956/57, potentially catalyzing further significant equity gains, similar to what occurred in 1997/98.

Michael Hartnett (BofA), November 22, 2024. 

 

Decennial Cycle: Average annual change in the DJIA (1881-2023).

 

 Ned Davis Research.

See also:

Tom DeMark (November 15, 2024) - US Stock Market Nearing a Top Similar to 1929.

S&P 500 Cup-and-Handle Breakout Targets 5,930 & 6,180 | Stephen Suttmeier

The S&P 500 has experienced a bullish breakout from a cup-and-handle formation that formed between July and September, indicating potential upside targets of 5,930 and 6,180. 

Seasonal trends for the fourth quarter further support these targets. Last week’s tactical breakout appears strong, with support near the 5,775-5,745 range. Importantly, the cup-and-handle pattern remains intact as long as the S&P 500 stays above the 5,600s.

Stephen Suttmeier — October 15, 2024.  

S&P 500 Projection Chart from 2009 to 2025 | Jeff Hirsch

We are revising our 15-Year Projection chart. This was first drawn in 2011 when our book Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It (Wiley) hit the stores. The projection was based upon, drawn from, years of historical patterns and data. In the years to follow numerous unprecedented events occurred, the Fed held its key lending rate in a range of 0 to 0.25% for an incredible seven years, under took multiple rounds of quantitative easing (QE) and essentially pledged unwavering support for the market. Many other nations and central banks around the world were taking similar or even more aggressive steps to support their own economies and markets. Negative interest rates and negative yields on 10-year bonds are not what we consider normal.
 

 

 

Our current updated projection is illustrated in the red line in the chart. In keeping with the history of market performance in pre-election years and the current trajectory of the indices, it would not surprise us for the market to continue rising through April make new high here in Q2, then pause over the weaker summer months before hitting higher highs toward yearend. Next year promises to be an embattled election year and the likelihood of another significant correction or even a bear market are higher.

 

Quoted from:
Jeffrey A. Hirsch (April 11, 2019) - Super Boom Is Underway!

 

 

 David Hickson: Hurst Cycle Projection for NASDAQ and S&P 500 — September 9, 2024.

 

 Jeffrey A. Hirsch: S&P 500 after Quadruple Witching Week — September 17, 2024.

 

Jeffrey A. Hirsch: S&P 500 Seasonal Pattern for September 2024 — September 5, 2024.

   

Jeffrey A. Hirsch: S&P 500 Seasonal Election Year Pattern for 2024 — February 28, 2024.

 

Robert Miner: S&P 500 and the Election Year Cycle — April 25, 2024.

 

 Ned Davis: S&P 500 Cycle Composite for 2024 — February 2, 2024.

 

Ned Davis: DJIA Presidential Cycle 2024 to 2027 — December 29, 2023. 

 

Ned Davis: Unprecedented Times vs DJIA Election Cycle — August 14, 2024.

 

Nautilus Research: Full View of the S&P 500 Election Cycle — September 1, 2022.

 

  Moore Research: S&P 500 23 Year Seasonal (1997-2019) — January 2, 2020.

Larry Williams: 2024 US Stock Market Outlook — December 15, 2023.

 

 Ned Davis: DJIA Decennial Cycle for 2021-2030 — February 2, 2024.

 

seasonax: DJIA Decennial Cycle & 4 Year Election Cycle — 2024.

 

2024 in the Presidential Cycle Pattern

 

 

 

Reference:

Edward Yardeni (November 30, 2023) - Stock Market Indicators: S&P 500 Presidential Cycles.

S&P 500 Projection Into June 2024 | Allen Reminick

 

 

The November rally is likely to experience some downside pressure in the first half of December and the first half of January. 

After that, we expect higher prices until March and April of next year.

Quoted from:
Allen Reminick (Nov 18, 2023) - Market UP till April, But Watch for Down Moves. (video) 

 

Equities Expensive and Commodities Cheap?

Incrementum AG (Jun 1, 2017) - In a historical context, the relative valuation of commodities to equities seems extremely low. In relation to the S&P500, the Goldman Sachs Commodity Index (GSCI) is currently trading at the lowest level in 50 years. 

The chart outlines the valuation of the GSCI relative to the S&P500. The GSCI comprises 24 commodities from all commodity sectors and serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. If the ratio is low (green circles), it means that commodities are cheap relative to shares. If the ratio is at a high level (red circles), like during the Gulf Crisis in 1990, the prices of raw materials are relatively expensive.

The current ratio is 0.87 while the median is at 4.1. A return to the median gives 371% potential, but in most cases a rally doesn't stop at the median. In absolute terms, the scene seems set for a new bull market for commodities. According to Ned Davis Research, commodities gained 217% on average over the period of a bull market. 

Stock Market Capitalization as a Percentage of GDI | 1925 - 2016

Total market capitalization (TMC) of the stock market as a percent of Gross Domestic Income (GDI) is 126%, the second highest in 100 years, only exceeded by 164% just prior to the 2000 tech bubble. This highlights the extreme extent of stock market distortion, which can largely be attributed to artificially low interest rates. Because stocks are an unusually large percentage of the economy, a stock market correction would undoubtedly stunt economic growth. Because the market is so high relative to GDI, corrections will have a greater negative impact on the economy. Furthermore, this ratio's lofty level illustrates just how overbought the stock market is in general, signaling the potentially precarious state of the markets (Chart: Ned Davis Research).