Welcome to the Sea of Echoes

The market has been through some major shifts in the last couple of months, and it makes sense to look at historical prices, if only to get an idea what the time constants underlying mob behavior really are.  If you zoom out over the last 16 years or so and look at the share price for the SP500, you get a chart that looks like this:

 The red lines are simple linear trends on the log data, so they represent constant exponential growth and decay with time.  It is pretty amazing that the major trends in the data can be explained by just four changes in the long-term growth and decay rate.  Let’s examine each of these in turn and consider what factors might be driving the stock market’s multi-year cycles.

Turning Point A: January 1995

The first major turning point is in January of 1995, the second term of the Clinton presidency.   There are several factors which could contribute:

• During this time Netscape and Dell were ramping up penetration of PCs and the internet in American households. 
• May 2003 - capital gains cut to 15%
• The federal funds rate was also rising from a long period of easy money at 3% to 5% at the end of the year.  1995 was also marked by a spike in treasury yields.
• And Newt Gingrich and the Republicans had reclaimed the house with the so-called “Contract with America”. 
• Formation of the WTO.

Turning Point B: 2000

In early 2000 the SP500 turns south to the tune of 15%/year.

• The start of the Bush Presidency
• The beginning of dearer oil (at slightly higher rates of $24/barrel)
• Higher interest rates (federal funds rate of 6.5%)

Interesting although the 9/11 attacks may have contributed to the continued slide, the downward trend in the economy was already present in mid 2000.

Turning Point C: late 2002

• Gulf war II begins
• Federal funds rate lowered to 1.25%, partially in response to 9/11 and downturn

Turning Point D: late 2007

• Financial crisis
• Mortgage meltdown

It guess the major open question is how do these events correlate to the flows of money which amount to trillions of dollars and how to we detect that the tide is receding or advancing…