HERE are some examples of Brock Value in action. Let’s start with a look at the market breakdown in 1962, shown here on the next chart as the Kennedy Panic. You can see the sell-off in yellow, set against three valuation bands. The white line is Brock Value, the market’s intrinsic value, and the market’s normal range is bounded by the red and green lines on either side.
The downslide in 1962 ended a two-year spree in low-grade stocks. The sell-off began with investigations on Wall Street, which kicked the market lower. Then Kennedy and the steel industry had a showdown, which frightened investors and made them run. The market promptly fell 27 percent, and most of it in only three months. This broke the long, powerful uptrend in place since in 1949.
The Kennedy Panic
A good time to sell? Or a good time to buy? Notably, even after the sell-off stocks still yielded less than bonds. Investors of the day saw the yield situation as a signal to be cautious, because decades of prior experience led them to believe that stocks should yield more, not less, than bonds. The market wasn’t cheap on an earnings basis either. And many people saw in 1962 that nuclear war was entirely possible, if not imminent. It seemed like a good time to sell.
With the advantage of hindsight, we can see that selling was hardly the right move. The BV line had not fallen. In fact, a large gap between value and price appeared. Shortly after this crisis, surprisingly good economic news kicked off a recovery and the market made a new high the following year. This run up continued for another two years, until overvalued conditions prompted a mild bear market in 1966. Note how the market fell into line after the downmove ended. At this point the stock market entered an episode of speculative dementia known as the Go-Go Years.
The Go-Go Years
In spite of rising interest rates, stocks spent the Summer of Love — and most of the next year — high as jet planes. Strange young computer companies traded insane volumes, with many stocks up twentyfold. Meanwhile, conglomerates and chain stores lured in excited investors, promising them new ways to make easy money.
Once again a gap between price and value appeared. The market had left its normal range behind in 1967 — when it shrugged off the decline in BV. It now proceeded to levitate. Finally, when interest rates began to rise again in 1968, putting the trend of intrinsic value to the downside in earnest, the stock market tripped the kill switch and topped out.
It was a bad bear market. Curiously, after an unpleasant 36 percent descent, the market came to rest in 1970 on the red overvalued line. But once interest rates stopped going up, stocks stopped going down. The market then resumed its upward flight.
the sincerest form
of collective stupidity.
The Nifty Fifty
In the rebuilt stock market of the early 1970s, small cap stocks were in disgrace. Large cap growth stocks, on the other hand, were nifty. Money managers were tired of decisions and wanted one-decision stocks that could grow indefinitely, like Polaroid. Stocks this good were worth easily 40, if not 90 times earnings. And for a long time, as long as money managers kept buying the goods from each other, they were.
Back in the Go-Go Years, recall how the BV line turned down but the market kept flying, for a time. In the Nifty Fifty era, the overdone market felt the pull of gravity before the economy showed any indication of a slowdown. The market and BV then paused together until late 1973. After that, we watched them nosedive arm in arm as Watergate, inflation and the oil crisis took the dreamers down.
Two years later, the market was down 45 percent. It had been the worst bear market since the Crash of 1929. In valuation terms, the S&P sat at the same discount to BV as in 1962. From here, a reflex upmove carried the market back to fair value — briefly — and BV made its way forward with market in tow, until another bear phase arrived in 1976.
The years from 1977 to 1980 on the next chart reveal a stock market in despair. The mood was dismal. Money managers thought they couldn’t lose in 1972. In 1978 they were sure they couldn’t win. A year later Business Week published their infamous cover announcing the death of equities. Stocks languished, unloved, while gold and interest rates caught fire.
Normal at last
From 1980 to 1987, the market traded within normal valuation range, bouncing off the over and under lines. The ride ended in 1987, when BV sagged as interest rates spiked, leaving the market suddenly overvalued, a condition it relieved shortly thereafter. From then on, until 1996, the market remained inside its normal boundaries.
Watch out when getting all you want. Fattening hogs ain’t in luck.
The Internet Bubble
After 1996, the stock market grew progressively more detached from economic reality. The next chart shows how the Internet Bubble grew like a strange black flower, until it traded higher than twice BV. Only 1929’s market was more expensive. From here, the only way forward would be down.
The Dotcom Crash
The Dotcom Crash washed away the excess, but unlike most severe bear markets, the S&P didn’t fall below the green undervalued line. As in 1966 and 1982, when the downturn ended, the S&P rode the line for a few months as the band played on.
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