A top Citi analyst just warned the market may crash another 33% wiping out 5 years of gains.
The Good News Is
May 19 (King World News) – Top Citi analyst Tom Fitzpatrick: Actually, I don’t have any good news. Last week we focused strongly on the important support levels on the Es1 chart (S&P futures) all of which subsequently gave way.
At the weekend the “Diary” piece was titled Diary: Year 3, Week 13:The Exorcist focusing on the backdrop in 1973 (When the Exorcist was the largest grossing movie) and the battle with inflation by the Fed under Arthur Burns with a variety of factors that resonate with today.
This week I am going to combine those two thoughts in an effort to maybe have a good Equity market playbook from here.
1973 was a turbulent time for the S&P…
The S&P hit the years peak on 11th January 1973 and moved sharply lower from there. (It peaked on 4th January this year)
That started a move that saw a high to low drawdown of 23.35% over the course of the year and a yearly close down of 17.36% (The relative improvement solely due to a bounce off the year’s low posted in December.
Similar numbers this year FWIW would see the S&P fall as low as 3,693 and close the year around 3,982.
Of course, it is highly unlikely that we will see precise numbers like that, but they are an interesting starting point – a roadmap if you will.
Another important “wrinkle” with regard to 1973. That was one of only 3 years in history back to 1937 that the S&P posted a bearish outside year. The other 2 were 1966 and 1937.
The Shoe Does Not Fit
1966 does not really fit. Yes, we did have the Vietnam war but that had been going on nearly a decade and lasted a decade longer (So more like Afghanistan than Ukraine). Inflation was still very low ranging from 0.9% to 3.3% after years of benign numbers.
1937 fit in some respects: The market had a bullish outside year in 1935 (one of only 4 seen between then and now) The market also had a bullish outside year in 2020. The low to high move in 1935-1936 was +119% and the low to high move in 2020-2021 was +119%. The market closed up 28% in 1936 and closed up 27% in 2021.
In 1937 the market had a bearish outside year closing down 38% in what ended up being a six year fall of 60%. Obviously we are not envisaging that here.
But It Fits For 1973
1973 had the Arab-Israeli war, the Oil shock and the Fed struggling with rising inflation.
S&P 500 (BLUE LINE) Mirroring 1973-1974
(BLACK LINE) Stock Market Collapse
From the 2018 close at the end of Fed tightening cycle to the 2021 close the S&P rallied 90% from 2507 to the market high (90% return over 3 years).
IF (and it is a big if) we replicated 1973-1974 and fell high to low 48%, in 2022-2023 that would take us back to 2,506 and transfer a 3-year 90% return into a 5-year ZERO% return.
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