Investor Essentials Daily

History May Not Repeat But It Rhymes: What This Eye-Opening Chart & JP Morgan Tells Us About The Next Bear Market

January 13, 2020

Investor Essentials Daily:
The Monday Macro Report
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Take a look at the chart below of the US stock market index:

Here are some of the actual headlines during the bear market side of that cycle:

“Financial Contagion Spreads”

“Major Brokerage Nearly Collapses”

“Interest Rates Soar”

Credit markets seized, bankruptcies were popping up across the country.

Then, another memorable newspaper headline:


JP Morgan was instrumental to that bailout. Major bailouts had to happen to save the financial system and the economy.

The aftermath of this cycle was a fanfire of congressional activity and new banking regulations.

Does it look familiar? Were you paying attention to this up and down cycle of stock prices at the time it was happening? When the market fell about 50%.

Guaranteed you were not. That’s 100% certain. Let me explain why.

You’re probably thinking of Bear Stevens collapsing along with Lehman at the time of this chart.

You may be thinking of AIG being bailed out then, also. You’ll want to call this the Great Recession.

Not the case at all.

Take a closer at the chart, and note two things that should look incorrect:

First, note the level of the market at the time. Was there any major stock index that would have been as low as “50” during the Great Recession?

Note the dates. Did the market bottom really occur in late ‘07 and then rebound handily into January ‘09?

The answer to both of the above questions is “Yes.”


Because, this chart, and the actual newspaper headlines mentioned above, are from what history has termed:

The Market Panic of 1907

About one hundred one and a half years earlier than the Great Recession, the US experienced a bull/bear market cycle with an uncanny resemblance to the cycle just over a decade ago.

A crisis of liquidity and credit quality and confidence in the financial system caused a seizure in the economy overall. It required a massively orchestrated show of financial force for the system to be righted.

Reading about the 1907 crisis is a fascinating view into the market cycles of the last 100 years.

In the Panic of 1907, JP Morgan, the man, not the institution, was instrumental in the bailouts.

When in midtown Manhattan, our Director of Research, Rob Spivey, often visits the J. Pierpont Morgan Library.

Personally, I enjoy stopping by the Morgan Cafe in the large center court for a decaf coffee. It’s a beautiful, peaceful space.

Built in 1906, it was in the library room there that JP Morgan gathered some of the most influential financiers of the time.

He told them to fix the financial problem. He said he would keep the door locked and would not let anyone leave the room until they determined how they were going to fix the crisis.

The crisis of 1907 led to the creation of the Federal Reserve system.

You can feel the history in that room at what is now called the Morgan Library and Museum, still at 225 Madison Avenue.

This chart and the accompanying headlines are a powerful tool for investors today. It teaches us lessons about market cycles, the drivers, and the leading and lagging indicators.

These still hold true today. And they will hold true in the future.

As we highlighted in last Monday’s Investor Essentials Daily, the biggest factor that drives economic growth and equity market cycles is the credit market. Credit creation helps fuel a bull market and economic growth, credit destruction is the catalyst for a deep bear market and of a recession.

It is only by looking back through history, and seeing how the market trends, and the actual economic factors, repeat over and over, that we can get a better understanding of what factors drive the market.

Good macro research comes not from reacting to the daily ticker tape or whatever is on CNBC, but having a sound consistent strategy rooted in economic reality.

As we covered last week, and as we’re covering each Monday going forward, we’ll take you through our process that we call the Market Phase Cycle™.

As much as anything, this framework gives us confidence in our outlook for the market for the near and mid-term future. We hope it will give you confidence too.

All the best, as always,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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