Rick Bensignor of Wells Fargo Securities says his research shows parallels between the market highs in December and the peak in September 1929. However, he is ‘not looking for a crash … like what ultimately took us to the 1932 bottom,’ but a repeat of the first leg of that decline which was 15 per cent, noting that: ‘Given market forces today, a similar 15 per cent decline could happen in the near-term.’
Why would a sell-off stop there? Well presumably the Fed put would come into play with new Fed chair Janet Yellen being put to the test, and QE would quickly be back to full tilt. Traders’ inclination to buy on the dips ought to do the rest, at least in theory.
But stock markets are not designed to only head in one direction forever. It is easy to forget that after a five-year bull run. And when they change direction the fall to the downside can be much more dramatic.
If stocks have become as overvalued as they were in 1929 then a similar collapse could be anticipated. Why should equities not give back the 40-50 per cent gains of the past two years that are far from justified by profit performance over that period?
Shares have only been driven to these heights by continuous money printing that has gradually lowered the return investors will accept on stocks. Now that this money printing is being wound up and interest rates are moving higher it stands to reason that share prices will have to drop to accommodate that new reality.