Clinton/Kennedy: Amazing Stock Market Similarities
reprinted with permission of The Wall Street Journal
Flip on your radio. Do you hear "Moon River"? Check the marquee at your local movie theater. Is "West Side Story" playing?
Well, it's not 1961 in the real world, but in the stock market it's late 1961 revisited, says Ned Davis.
Are Striking Similarities a Great Opportunity for Huge Profits on the Short Side during 1994?
Mr. Davis, a Nokomis, Fla., stock-market researcher who is respected for his technical and historical insights, sees striking similarities between the stock market's behavior so far under Bill Clinton.
Chart in Print Copy
Similarities Began Early
The similarities began during the election campaigns of 1960 and 1992. As it looked increasingly likely that a young Democrat would replace an older Republican, stocks dipped. Once Mr. Kennedy and Mr. Clinton took the reins, stocks reversed and began to climb.
During Mr. Kennedy's term, stocks topped out in December 1961, drifted sideways for a few months, and began to tumble in April 1962. A nasty bear market dragged the Dow Jones Average down 27%.
Is history about to repeat itself? Mr. Davis thinks so. He points to a flock of similarities between the market climate then and now.
More Similarities
In 1961 stocks were selling for over 20 times the prior 4-quarters' earnings. The same is true today.
The high stock prices, in 1961 as today, had pushed the average dividend yield on stocks down to well under 3%, a traditional warning zone. By almost any measure, both 1961 and 1993 are among the most expensive markets in history. And in both cases, the high valuations had persisted for an unusually long time - a year or more.
"People who are saying we're safe now (from a market decline) are pointing to low interest rates," says Mr. Davis. But, he adds, "interest rates were much lower then," and that didn't prevent the scorching 1962 bear market.
In November 1961 inflation was running at less than 1% (vs. perhaps 3% today), the interest rate on Treasury bills was about 2.5% (vs. just over 3% today) and long-term Treasury bonds yielded about 4% (vs. about 6% today).
Foreign Affairs Dominate Over The Economy
Both Mr. Kennedy and Mr. Clinton came into office intending to concentrate on domestic affairs and get the economy moving again. Mr. Davis says. But both had to devote considerable time to foreign crises. Mr. Kennedy had to deal with the Berlin wall and the failed Bay of Pigs invasion in Cuba. Mr. Clinton has wrestled with problems in the former Yugoslavia, Somalia and Haiti.
Mixed Technical Indicators
The stock market today, as in fall of 1961, is characterized by mixed technical indicators and "a lot of churning," Mr. Davis says. Technology stocks were leaders in both markets, and in each case the pipeline was gushing with newly issued stocks.
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