Numbers, history can’t explain market

By John Cunniff The Associated Press
Tuesday June 12, 2001

NEW YORK — These are times that test not only the financial courage of investors but the nerves and credibility of financial advisers. 

They have both been wrong – most of them – and are anxious now to dismiss even the memories of the recent and unlamented carnage and set their minds to the more comfortable prospect of a rising market. 

But there’s a problem. The market isn’t listening.  

It has come back a bit, but whenever it seems ready to launch a late-1990s type surge, up comes a warning from historians or a negative report from economists. 

So, with the market failing to respond robustly, at least in ways investors have become accustomed to, and with forecasters and advisers unable to nudge it along as they did in the old bull days, what do you do? 

You retreat to longer range thinking. You get philosophical. You seek explanations in history and numbers. 

You go back to basics, says Jim Griffin of Aeltus Investment Management.  

Basics such as earnings and discount rates, the fundamentals of business cycles, the lessons of economic policies and the like. 

But even here there are problems.  

“What we really know about such basics can’t be dignified as much more than speculation, hypothesis and folklore,” says Griffin. 

If that sounds like capitulation, it is reinforced by his declaration that: “Much of the confident assertion of what is taken to be truth today is the nearly perfect obverse of what was taken to be truth a year ago.” 

Seeking understanding, Griffin looks for it in epistemology, or the study of the nature and validity of knowledge, and concludes that “what we can’t know is just how and when a market bottom might be formed.” 

Financial planner Jonathan Pond seeks truth less in short-term specifics and more in longer term forecasts in his report, encouragingly entitled  

“Some happy news for my beloved, albeit beleaguered readers.” 

First, he informs them, “We can look forward to longer and healthier lives.” 

And that “investment opportunities will proliferate.” And that “the longer-term economic outlook is positive in the U.S. and overseas.” 

Most encouraging of all, he reports that “Bear markets end and the rebound is usually substantial.”  

But then he adds “if only we knew when declining stock markets end.” 

Trained to believe in numbers and history, technical researchers at Salomon Smith Barney, have studied every discount rate cut by the Federal Reserve all the way back to 1914 and matched them against market action. 

The task was rather prodigious, since no less than 18 series of reductions have occurred in that time, and most series contained multiple cuts.  

For example, there were nine cuts in the one series of reductions between November 2, 1981 and December 15, 1982. 

In most cases following the cuts, the markets got a hefty bounce.  

This time around, the markets haven’t responded with the same buoyancy. 

Why this should be so is perhaps a matter for philosophers. 



John Cunniff is a business analyst for The Associated Press