How long and how deep will this AIM Bear Market go?
These markets are suffering badly from a global liquidity squeeze as central banks remove QE and hike rates. The media is enjoying pinning the blame on Truss and Kwasi Kwarteng but the real issues run a lot deeper. I'm not going to go into global macro mode, but it's pretty clear that we're now paying for all the Ponzinomics that have gone on for the best part of 20 years. Whether central banks can reintroduce the punch bowl remains to be seen - but I've no doubt that at some point these stock markets will turn around.
Given the above, and given we're all hurting in our equity portfolios, I thought I'd take a look at the FTSE AIM All Share history. I always think think that the AIM market is the best barometer of private investor sentiment in the UK - when its rising animal spirits rejoice, when it's falling those spirits retreat to their cave. Right now we're all in our caves.
In doing an analysis like this, one has to be very careful. You can't apply the lessons from the past unless they apply to the future. There is a real risk that there's a "regime change" going on. If we are shifting from a perpetually low interest world, to a perpetually high interest world, then this analysis may be redundant. Nonetheless, it's instructive so let's proceed.
Drawdown Charts
Below is a chart of the FTSE AIM All Share in blue. I have history for this index back to 1996, but I've decided to exclude the dotcom drawdown period (2000-2003) as that was such an unusual period, and the AIM index was full of nonsense companies. I remember it well - there was one conference I went to where someone stood up to talk about their just floated IPO (which seemed to have 1 employee - him - and a slide deck and no business) - and it went from a £5m cap to £50m overnight. Might have been £100m. Can't remember the name.
In **grey** is the maximum price over the trailing 24 months. The difference between grey "max" price and the blue "index" price is the current **drawdown** - which is published in red underneath the chart. Please note that this is not a % drawdown chart - it's a nominal chart - so you can't really compare each drawdown period like for like.
Drawdown length
Nonetheless, eyeballing the chart for depth and length is a very valuable exercise. In this chart I've calculated the length of each bear period by days. This was an artful exercise from a more 'human' point of view, and deliberately excludes a false, early high early in the chart. While the above numbers are approximate - over the last four bearish drawdowns the average length of the drawdown has been roughly 600 days.
The current market drawdown is 387 days long. This suggests that the market may not find its base for some time. On the other hand in most of these bearish periods the declines have been front loaded - so there is some optimism that we could be heading into a period of significant buying opportunity.
Drawdown depth
This is the third largest drawdown in the last 20 years at roughly 500 points on the index.
I've done another analysis which is on a percentage basis. It extends the chart back through the dotcom period. This chart is more brutal, and less forgiving of the start date of the global financial crisis peak.
- In grey is the days since the 2 year maximum price.
- In red is the percentage drawdown from the 2 year maximum price.
We can see clearly here that the number of days since peak (which feels a LONG time) is really rather a small grey triangle at the right hand side, compared to history. We can also see that there have been three periods where the FTSE AIM All Share has corrected even further than the current -38%.
Conclusions
This is food for thought. It's worth remembering that there are a LOT of micro-cap, low ranked, speculative shares in the FTSE AIM All Share - and sensible, profitable companies tend to find their base faster. If I ran the above analysis for higher QVM shares, or the FTSE 250 I have no doubt that we'd find shorter drawdown periods and percentages. So hold onto your hats, and don't jump to the conclusion from the above that you should throw in the towel. I'll report back soon.
About Edward Croft
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Thanks Ed for this useful analysis. I am interested in the outcome of the above analysis for higher QVM shares.
Love the word Ponzinomics, Milton Friedman has probably been turning in his grave over this last 20 years. Lessons in how central banks can turn a 3 or 4 year period of banks in trouble into a 15 year period of massive asset price inflation then wonder why we have a general inflation problem now. But can't blame it all on the central banks, KK is seriously competing on the incompetence ratings.
I dont think your trailing stop loss helps this analysis, does it? If you have a 24 month trailing stop loss, then the longest draw down can only be 24 months. And you give an average of 600 days! But when you look at the graph you can see a lot of the dips are longer than 24 months. In the worst case it actually takes 15 years to get back to the 2005 peak.
Excellent analysis Ed and very informative! It suggests that we probably won't see a meaningful turnaround, in the AIM index at least, for another 100 days or so, i.e. the New Year, which is often a time for a bounce anyway after we've all had a good break with time off work and a chance to look back at the past year.
Great analysis Ed - thanks. Very interesting to run the data on AIM. Possibly quite similar to the Nasdaq?
This looks like an asset bubble burst recession unfortunately with all assets reducing in value at the same time. I would recommend "The End of The Everything Bubble" Alasdair Nairn's book from 2021 which has been spot on so far - good reading if you want to get depressed!
The data suggests we might be somewhere between half way and two-thirds of the way through.
I saw some interesting data on the S&P500 peak to trough for all recessions since 1927. 1932 and 2002 were over 600 days, and 1942, 1982 and 1974 were about 450 days. My own personal view is that the US drives the markets and that has not yet capitulated. Given the size of the bubble created by QE we may be more in the 1932 and 2002 camp, but 1974 is looking more comparable in Europe with the oil (1970s x8) / gas (2022 x10+) shocks.
Time will tell, but no doubt things will eventually get better - they normally do!
Because high QVM and FTSE 250 shares (which are high QVM) generally go up and to the right. AIM All Share goes sideways as it’s more relatively full of junk (low to medium QVM).
In a sideways market you have to set a look back period. Without it, drawdown analysis is meaningless. The 2 year period was generated by eyeballing the chart. It’s not a science - just look at the chart and view the wave periodicity. You could use 3 years - wouldn’t make much difference.
Almost a year since my small cap investments started taking their first blow and I feel like I’m watching a slow motion car crash.
The Milton Friedman monetary fan club are out in force, from Mohamed El-Erian, Larry Summers and even ‘our Ed’ now throwing around phrases like Ponzinomics.
In the US, following QE1, QE2 and QE3 there were no asset purchases between 2014 and 2020 yet inflation remained benign.
This is way beyond the generally accepted 12-24 month time lag for monetary policy to weave its intended and unintended consequences. The data shows that believers in the doctrine of monetary and fiscal austerity are not always right.
People seem to struggle with this. Maybe it's because they were raised in the austere decades right up through the ‘50s, 60s and 1970s when Pink Floyd cried “How can you have any pudding if you don’t eat your meat!”?
Admittedly, inflation rose in the second half of 2021 after QE4, a huge fiscal stimulus to fight COVID and a series of supply chain shocks. Central banks and governments have over cooked the stimulus and now we have a UK government taking a walk on the wild side.
From the Daily Mail to MoneyWeek’s James Ferguson they rejoiced with ‘I told you so’.
I believe capital from wealthy institutions and people drive stock markets. A dogmatic, sole focus on inflation by the US Fed has brought higher interest rates, reduced capital market liquidity and concern about future economic strength.
In these conditions the wealthy are unlikey to risk their hard earned cash in the stock market and instead settle for less risky (and now higher yielding) fixed income assets. I fear we could be here for some time.
The endemic blind faith in monetary tightening and higher for longer interest rates, to his own admission, is making one of El-Erian’s ‘financial accidents’ more likely. And, once the vicious cycle of lower demand, begets lower supply, begets lower demand gets going, Larry Summers ‘hard landing’ becomes increasingly difficult to avoid.
The money hawk brigade should be careful what they wish for. We may yet need a return to lower interest rates and a QE5 version of Ponzinomics to save us from the misery of dogmatic monetary austerity.
This is incredibly helpful, especially when read alongside Edmund's more specific analysis. The takeout for me is that if you are lucky enough to have gone into cash then now is the time to start dribbling money back in. I bought UK housebuilders a few weeks ago and they are still at a loss, but my filter was 1) Will this company go bust or need to raise a load of money 2) Is it likely to double in 5 years? On that basis I'm happy.
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Thanks Ed for this perspective. Let’s hope the NAPS picks up quicker due it’s big diversity!