When we meet, you will have a hard time placing me. I sound like I’m from here, but also from over there. I am small, but will captivate you with my big insights. I struggle to play poker, but have an uncanny knack for predicting numbers. I am unquestionably a paradoxical human, with a talent for seeing patterns.
Seeing patterns may not seem like much of a thrill. Certainly, in my experience, it has never come in handy at a party. There are a few odd cases though, when my talent for seeing pattens has put me at an advantage — when I worked on Wall Street in the late 1990’s, when I analysed market trends in Taiwan in the same decade, and today, when I think about technology product futures.
Mostly, seeing patterns is a skill that comes in handy when predicting what will come next.
Whoa. Predicting the Future is so Trippy Man
Actually, it is not.
A few years ago I had the great fortune of meeting Alexander Manu (🙏 Sensei), author of a great number of books that explore strategies for how to de-risk the future in the space of design, technology and innovation. In Behaviour Space, Manu argues that the future is a predictable consequence of the signals that already exist around us. Human nature, technology, desirability, opportunity, perspectives, motivators, experiences and economoc models can all be mapped out as they are now. Each can be extended by a small delta, a low risk educated guess, and from all those tiny deltas, we can infer with a high degree of certainty exactly what the furure will look like. Motorola, Lego and Unilever agree.
According to Manu, the future is quite clear if you understand the signals, and have a keen eye for extrapolating patterns.
The finance guys know too much
I moved to New York City as a bright eyed technologist in the late 1990’s to work on the trading floor alongside Quantitative Analysts. It was the tail end of the Wolf of Wall Street era — a time when the coffee shops on Hanover Square sold little pills in packets for impulse buyers at the tills (I naively thought they were vitamins!) and 21 year old brokers were driving Ferraris. My job was to build the tech that would help the Quants predict the future. Despite volumes of data about the past, and the best minds coded into algorithms, we actually did a very unremarkable job of accurately predicting tomorrow.
Fast forward to today, and, despite the advances in technology, AI, Big Data and predictive analytics, we are still doing a remarkably unremarkable job of predicting the future.
The stock market is subject to emotion, fear, and human input, not pure mathematical or financial data. Factoring in the complexity of human input into the stock market is why it’s ultimately a fool’s game to try to time ANYTHING related to the stock market — Don’t buy the “Coronavirus Dip… Yet”
Part of this is because the finance guys know too much — they are too deep in the details to see the larger patterns. They focus on percentages and market capitalizations and rates of return. They focus on things that make sense on paper.
Why would a toilet paper producing company with terrific assets be worth less in the wake of a crisis that induces mass toilet paper buying hysteria?
Panic makes markets drop. Panic is not at all rational — but panic is predictable.
You need to step back to see the patterns
Deja vu. The past is an indicator of the future. 2020 hindsight. These timeless clichés are clichés for a reason. When markets drop because of fear, it’s hard to predict how long the tail of those effects will be — and in general, it’s a fool’s game to try to guess the bottom of the market. The only thing that is for sure is that there will be a bottom, and this bottom will present opportunities.
And if you look at the patterns from the right perspective, you can exhale in knowing that you have time to take action.
Last week’s sell down on the US and Australian stock markers is a prime example of herd mentality and fear in action. The over-exhuberance of the market in the last few years (generally, indexes tracking positively, so anyone in the market was making money) resulted in all time highs. The abrupt reversal was ambient nervousness triggered by the spread of Coronavirus. Coronavirus itself was not the cause of the market downturn.
Patterns in the ASX
Australia. A tiny and now locked-down island in the south Pacific. Australia is approximately 78% of the size of the USA. We have no Alaska to lean on. As the value of our stock market is only about 6% of the value of the US market, we can’t help but be led by overnight happenings in the US. If the US market goes down, it is likely that Australian Stock Exchange (ASX) goes down; if the US market goes up, the ASX is set to follow like the tail end of a slinky.
Looking at the last 35+ years in the ASX, there are 8 events that caused dramatic drops in the market. The 1987 stock crash reduced values by around 50%; the US bond market crisis deleted 22%; the GFC of 2007 delivered a 54% haircut. The current 2020 Coronovirus has sparked a meltdown that has already shed greater than 30% or $140+billion from the ASX.
Every single one of these market crashes eventually had a turnaround. If you bought at the bottom of the curve, you profited.
When will the 2020 market turn around?
Not being a finance person gives me a different perspective from which to view the historical patterns associated with stock market crises. In these patterns, I think it’s important to look at two factors (1) how long did it take for the market to drop to the lowest point during the crash, and (2) how long did it then take to recover back to the same level as before the crash.
Average time to reach bottom
On average, the time it has taken for the market to reach the bottom is 7.37 months. The COVID-19 crash started roughly on the 10th of March 2020. We can expect that the bottom of the market will be between June 2020 (3 months) and June 2021 (15 months). If we apply a historical average, that bottom should arrive around 20 October 2020.
Average time to recover
Again, looking at the historical crash data, the average recovery time (to the same levels as before the crash) is around 3 years. At a best case, we would see a complete bounce back in June 2020, and worst case a decade from now, ie 2030. If we sit on average recovery, that should come in 2023.
Right now we are only a few weeks in to the COVID-19 crash. To figure out when the bottom of the market will arrive, set yourself a timer for June 2020, and examine the evidence. Set another for late October 2020, and examine the evidence. If needed, set another for June 2021 and repeat.
How Average is the COVID-19 crash?
The best way to predict tomorrow is to look at the signals that we have today. The quantum of the COVID-19 crash is of the same order of magnitude as the 1987 crash and the GFC. Panic of this order of magnitude has a long tail, and human reactivity is consistent.
The GFC took 15 months to reach the bottom. Given the ripple effects of COVID-19 lockdown, which will result in businesses being uable to stay afloat, coupled with the degree of fear that surrounds an invisible and highly contagious virus, it’s more likely that the pattern to the bottom will be closer to that of the GFC, i.e. closer to the 6–15 month mark to reach bottom.
You have time
The average person in a Western Industrialised Nation makes around 35,000 decisions every day. It starts quite innocously: would you like the blue t-shirt or the green? Vanilla or Chocolate? What should we do today sunshine? And before you know it — wham — you are living a life where you routinely make 35,000 decisions a day. That is exhausting.
Panic is also exhausting.
In the context of what is happening in the world right now, with most countries imposing lock-down conditions (Australia has not yet confined all people to their homes, but Work From Home is the new normal, pubs, clubs and gyms have been shut, events have been cancelled and states have closed their internal borders), the Coronavirus presents a time to simply slow down.
You have time to stop making 35,000 decisions every day.
You have time to watch a movie with your kids, and make love to your partner.
You have time before the market bottoms out. And when it does, you will be ready with renewed energy and focus and well placed to take advantage of the opportunities that will come with a rising tide. Historical patterns guarantee that.