Tabell’s Market Letter – November 08, 1991

TABELL'S MARKET LETTER 5 VAUGHN DRIVE, eN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS. INC (609) 987-2300 November 8, 1991 We noted last httle-tbruiapparelrt'When', on week that, there can be Wed;e;daY7the market lIttle doubt.. responded to- thtehfaitftwh-e ;h;a-vne-. ;.-a;nutmUt ei-rtebset -rr a-teed-donuvnetnramtaer'kWeltt.h ThIS may have seemed less mOTe than-a-yawn — -We thmk, however, that It can be taken as gIven that conventional wIsdom has, for qUite some tnne now, tended to regard the dIrectIons of the stock and bond markets as bemg positIvely correlated. We remam skepttcal regardmg thIS supposed correlatton. and we mtend. therefore. to spend a few of these letters exammmg It In such exammations, It IS well to begm by takmg a long-tenn VIew, and the chart below does that, traclDg the monthly history of the DJIA and the yield for Moody's AAA Industnal Bonds smce January, 1919. The Yield, as inspection Will reveal, IS plotted on an mverted, loganthmic scale so that tbe senes shown effectively traces the hIstOry of long-term bond pnces. DOW JONES INDUSTRIAL AVERAGE . eONO MARKET BOiTOMS Ii VIELD – MooDVS AAA IHOUSTRl BONOS The fust and most ObVIOUS charactenstlc of mterest rates IS, as SIdney Homer noted long ago, the eXIStence of extremely long and persistent cycles Thus the entrre penod from 1920. when bonds returned 6.47, to 1940 (2.28), can be vIewed as a long buU market, and the 41 years to 1981. when the YIeld reached Just under 15, as an ongomg bear market. For the record, we belIeve that decade-01d low to have been the start of a long-term upward cycle m bond pnces whIch has, obvIOusly, a number of years yet to run These long cycles seem to have lIttle correlatton WIth the stock market. The 1920-1940buU market mcluded the upswmg of the 1920'5 but also the bear market of the 1930'5. At Its end stock pnces were Just about where they had been twenty years before. And the 41-year bond bear market saw some of the best stock markets m recorded htstory. What about the correlattonof the shorter cycles shown on the chart by solid verttcallmes at bond-market bottoms and dotted lines at tops Here the recent record IS good. Smce 1981, bond-market turns have accurately mlITored stock-market ones ThIS may en account for the current fascmatton WIth mterest rates as an explanatIon for stock-market behaVIOr. However. as a glance at the chart Will show, the record over tIme has been less ImpreSSive. Throughout the 1940's. 1950'5 and 1960'5, the bond market regularly turned down so long before the eqUity market that It was effectively useless as an mdlcator. If we regard major turns m the bond market (we use a 10 fIlter to defme major turns) as stock-market sIgnals, there have been 24 such Signals 111 the penod shown. FIfteen were correct, but the strategy of buymg and se1l1l1g stocks at bond-market turns would not have bettered the return from Simply buymg and holding eqUItIes. Looked at another way. If one uses hmdslght to defme bull and bear movements 10 the bond and stock markets, It turns out that, of 850 market months smce 1920, the stock and bond markets were movmg 10 tbe same dIreCtion m 430 months and in OppOSIte directIons m 420 months. Obviously, the supposed correlatIon between tbe stock market and mterest rates deserves further eXam1Oatlon. ANTHONY W TABELL Dow Jones Industnals (12 noon) 3062 16 DELAFffiLD,HARVEY,TABELL S & P 500 (12 noon) 39484 Cumulative Index (Nov 7, 1991) 6525.24 No statement or expressIon 01 oplnlOf\ m any ether matter heleln Conta.lned IS, QI IS to be deemed to be, dlrectl,/ or lrnilrectl'j, an offer or the so\\CltatVln 0\ an offef 10 bu,/ or sell an secunl relerred to or menllOned The matter IS presented merely fOf the convemence 01 the subSCriber While we beheve Ihe sources of our IIlfOrmatlon to be reliable. we m nO way represent or guarantee Ihe accuracy thereof nor of the statements made hereIn Any acllon to be taken by the subscrIber should be based on hIS own InvestigatIon and Informal!on Delalleld, Harvey. TabeU Inc. as a corporallon and lIS officers or employees, may now have. or may later take, poSItions or trades In respect to any secuntles mentIoned In thiS or any future Issue. and such posItion may be different from any views now or hereafter expressed In thIS or any other Issue Delafteld. Harvey. Tabelilnc whIch tS regIstered wrth the SEC as an mvestment advIsor. may gIve adVIce to Its IIlvestment advISOry and other customers Independently of any statements made m thiS or In any other Issue Further lnformallon on any security mentioned herem IS avaIlable on request