Why have some markets peaked at the change of a decade?
In Christmas week 1989, Business Week ran a cover story with the headline: "Japan's investors say the best may be yet to come". Four days later, exactly twenty years ago, the Nikkei 225 index hit a high of 38,915.87.
Nikkei blues
In fairness, few pundits predicted that the phenomenal growth of the 1980s would continue. Most acknowledged the demographic challenges facing the country, the issues around cross-shareholdings and transparency, and most importantly, the fact that the market was trading at a price/earnings ratio (P/E) of 78 times earnings!
So they moderated their forecasts for future growth. One long-term estimate put the Nikkei at 100,000 by the end of 1999 -- a relatively sedate 10% per annum growth rate.
With hindsight, of course, we know how wrong that was. The following two decades have been quite a roller-coaster ride for investors in Japan, and the predominant direction has been downwards. Just consider the following:
- Ten years later, at the end of 1999, the Nikkei actually stood at 18,934, less than half its peak value, and fall of 7% per annum;
- At its lowest, in March of 2009, it hit an intra-day low of 7,021, a drop of 82%, or 8.5% per annum; and
- Now, on the twentieth anniversary of the peak, it has recovered to 10,546, which represents an annual drop of more than 6%.
Even if we included dividends, and the fact that regular investing would have limited those losses, that still has to hurt. And there are people trading the Japanese market today who were born after that peak. We can only speculate on the effect the Japanese crash may have had on the thinking of US Treasury Secretary, Tim Geithner -- he started a two-year posting in the finance team of the American Embassy in Tokyo in early 1990.
FTSE ten years on
It's sobering to keep the Japanese experience in the back of one's mind when considering the future of the FTSE. By a strange coincidence, the British market peaked at 6,930 exactly ten years later, at the turn of the Millennium.
Its subsequent trough -- at least so far! -- was on 12 March 2003, as the conflict in Iraq commenced. We've seen a dramatic recovery in the meantime, with a lot of 'excitement' along the way; the FTSE stands at 5,420 as I write, nearly 23% off its high, and a loss of 2.4% per annum (again, ignoring dividends).
I've referred to the timing of these long-term peaks at the ends of decades as a 'strange coincidence', but others would argue that there is a calendar effect at work here, and that the approach of a new decade has some effect on the way we think.
If that's the case, could we be looking at another long-term peak in a major index or asset class? Gold, perhaps, give or take a few weeks?
And where do we expect the FTSE to be ten years from now? Or the Nikkei? Or is it better to ignore that question and just continue to buy the market, or buy what appears to be cheap?
Why not tell us what you think in the Comments section below. In the meantime, wishing you all a prosperous and Foolish 2010.
