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  • Apr 15, 2022 - The Power of "7": What it Means for the Market in 2022

The Power of "7": What it Means for the Market in 2022

Apr 15, 2022

Throughout human history, the number '7' has always been considered magical... it governs our lives in profound ways.

You will find it everywhere - the seven continents, seven seas, seven days of the week.

How many colours are there in a rainbow? That's right... seven!

There were seven wonders of the ancient world. How many deadly sins are there? You guessed it: seven again!

Heck, researchers have even found that the human body's cells largely replace themselves every 7 years. And interestingly, human memory works best when remembering up to - but not more than - seven items.

The number seven also has symbolic associations in religion, mythology, superstition and philosophy.

In Hinduism there are seven higher worlds and seven underworlds. There are 7 vows during a wedding.

Muslims on a pilgrimage to Mecca walk seven times around the Kaaba.

The number seven occurs more than 700 times throughout the Bible. In the creation story, God made the world in six days and rested on the seventh day.

According to Shakespeare, men go through 7 stages in their lives.

There were 7 dwarves that Snow White lived with, Sinbad the sailor had seven voyages and when Ian Fleming created James Bond, he did not give him the code 002 or 005, it had to be 007.

The list is endless...

But what does "7" have to do with the financial markets, you might ask?

Well, what if I told you that the markets also follow the number 7.

Every seven years, there is a major event or turn in the financial markets and 2022 is the next domino in the sequence...

The 7- Year Market Cycles

In an ideal scenario, all things should go up and to the right, signifying growth and success.

But in reality, the world and the markets tend to move in cycles.

Going all the way back to 1973, let us look at a sequence that occurs every 7 years like clockwork.

The 1973 Bear Market

The 1973 stock market crash was brutal. It was a global crash. Everyone took a hit.

Rather than starting with a sharp crash, the market's slide began gradually in early 1973 amid rising inflation and slowing economic growth.

The OPEC oil embargo of October 1973 and the Watergate scandal that led to President Nixon's resignation in August 1974 accelerated the declines.

The US stock market lost nearly half its value over two years, making this particular bear market one of the worst in US history.

1980- The Great Inflation & Silver Thursday

The year 1980 was characterized by two major events which almost broke markets around the world.

By the summer of 1980, inflation in USA had peaked at a life time high of 14.5 %, and unemployment was over 7.5%.

To curb inflation, the Federal Reserve under Paul Volker raised the federal funds rate from 8.5% in June to 20% by December of 1980.The intent was to break the inflationary spiral within the United States.

But raising the federal funds rate also made it more difficult to borrow money. This helped cause the 1980-1982 recession and a national unemployment rate of over 10%.

Another big catastrophe for the financial markets was avoided in March, 1980... due to what is termed since as the infamous Silver Thursday.

Silver Thursday refers to the dramatic fall in the price of silver on March 27, 1980, following the billionaire Hunt brothers' attempt to corner the market on the metal.

Although, it was related to the commodity market, the impact shook the entire financial system so much so that US government officials had to bail out the Hunts' brokerage firm, Bache, to avert what could have been a national financial disaster.

Stock Market Crash of 1987

And another 7 years later, stock markets crashed around the world.

The first contemporary global financial crisis unfolded on October 19, 1987, a day known as "Black Monday," when the Dow Jones Industrial Average dropped 22.6% in a single trading session.

The event demonstrated the unprecedented extent to which financial markets worldwide had become intertwined and technologically interconnected.

Stock markets in and around Asia plunged. The worst decline in world markets was in Hong Kong with a drop of 45.8% which resulted in markets remaining closed for four days.

The UK FTSE index was down by 23% and continued to fall until reaching a trough in mid-November at 36% below its pre-crash peak. Stocks did not begin to recover until 1989.

It is hard to pinpoint the exact causes of black Monday but it appears to be because of factors such as use of complex derivatives, overvaluation and program trading.

1994 Bond Market Crisis

In case you didn't know, the world's largest securities market is the bond market - not the stock market. Almost 3 times worth of bonds trade every day compared to stocks that trade per day.

1994 became the year of the worst bond market loss in history. The Federal Reserve began nudging short-term interest rates higher. And not just once or twice. It's again our favourite number...

Rates were hiked up 7 times from 3% in February 1994 to 6% in February 1995.

And when yields are rising, it means bond prices are falling. And they fell hard.

Bond investors and fund managers were caught off guard. It inflicted heavy damage on financial companies, hedge funds, and bond mutual funds.

Fortune magazine called it "The Great Bond Market Massacre," and with good reason.

The total losses suffered by bond investors and managers totalled over US$1 trillion dollars.

2001 -The 9/11 Terrorist Attacks and Ketan Parekh Scam

2001 was a terrible year for the stock markets.

In March of that year, one of the biggest stock market frauds in India came to light. Ketan Parekh, one of the most influential brokers at the time was arrested for artificially rigging prices of certain chosen securities, informally referred to as K-10 stocks, using large sums of money borrowed from banks.

The Sensex lost more than a thousand points over the next few weeks and there was a massive payment crisis across major exchanges. Many sub-brokers and investors committed suicide as the markets lost hundreds of crores of rupees in value.

And to make things worse, the tragic events of September 11, 2001 terrorist attacks in USA, exacerbated an already very difficult situation for not just India but markets around the world.

The shock in the US market driven by the attacks gave rise to a synchronous downturn for United States and nearly all major emerging markets around the world.

It resulted in a sharp plunge in the stock market, causing a $1.4 trillion loss in market value.

2008- Global Financial Crisis

Seven seasons later, the world saw the worst economic disaster since the Great Depression of 1929 - The Global Financial Crisis.

It started in the United States of America but quickly spread to the rest of the world.

The foundation of the crisis was built on the back of the housing market bubble that began to form in 2007 created by an overwhelming load of mortgage -backed securities that bundled high-risk loans.

It was a catalyst for a financial crisis that spread from the United States to the rest of the world through linkages in the global financial system.

Many banks around the world incurred large losses and relied on government support to avoid bankruptcy. Millions of people lost their jobs as the major advanced economies experienced their deepest recessions since the Great Depression in the 1930s.

By March 6, 2009 the Dow Jones Index had dropped 54% to 6,469 from its peak of 14,164 on October 9, 2007, over a span of 17 months, before finally beginning to recover.

Like all other markets around the world, the BSE Sensex also plunged by close to 60% from its highs of 2007 and it wasn't before September 2010 that investors saw those levels back again.

2015- Stock Market Selloff

And just like clockwork, seven years later, once again, there was a sharp selloff in markets around the world.

Investors sold shares globally as a result of slowing growth in China, a fall in petroleum prices, and the Greek debt default in June 2015.

On August 24, stock markets around the world were down substantially, wiping out all gains made in 2015, with interlinked drops in commodities such as oil, which hit a six-year price low, copper, and most of Asian currencies.

The 8% drop in China on August 24 was termed "Black Monday" by the Chinese state media.

In India, the Sensex recorded its biggest single-day fall of 1,624.51 points ending the day down 5.94%. Indian investors registered losses worth over Rs7 lakh crore.

World stock markets continued to fall in late September with trillions of dollars having been wiped off the books on global markets over just a couple of months.

2022-???

2022 marks seven years since the 2015 market sell off...

And ever since the beginning of the year, there have been ominous dark clouds gathering overhead.

Markets started off the year on a weak note following increasing hints from the Federal Reserve that the central bank will take aggressive action to slow down the jump in consumer prices.

For the first quarter of 2022, all major stock benchmarks saw their biggest quarterly losses in two years, ranging from a 4.6% decline for the S&P 500 to as much as 9% for the Nasdaq Composite.

The BSE Sensex lost over 10% in the first two months of the year.

There were primarily two major developments that resulted in these sharp losses.

Firstly, the US Federal Reserve hiked interest rates for the first time in almost four years, after having slashing them to near-zero at the onset of the Covid-19 pandemic.

Secondly, the Russia- Ukraine war spooked markets around the world. Russia's invasion of Ukraine shattered hopes of a strong global economic recovery from coronavirus, at least in the short term.

However, since mid-march, the markets seem to have overlooked the war and have recovered all of their losses.

But there is a burning question every investor wants to know- "Is the market correction of 2022 already done with or is this just the beginning of a long-pronounced bear market?"

The Truth Behind the 7 Year Sell off...

Not all stock market crashes look the same. Sometimes the market falls rapidly and unexpectedly due to a short-term catalyst but the recovery is equally quick like we saw most recently in 2020 due to the Covid pandemic.

In other cases, like the stock market crash of 2008, a deeper problem leads to the stock selloff.

At first look, it seems incredible that all of these crashes occurred 7 years apart.

But if you look more closely, there is an underlying pattern revealed.

The most important common thread among these 7-year events has been the stance of the US Fed monetary policy preceding them.

And if you are wondering what this has to do with our markets in India, well it does!

Because America has the world's largest economy, every economic move that the US makes has immediate effects on the global markets.

Going back to 1973, the Fed increased interest rates from 5.75% to as high as 11% over a matter of 8 months.

In 1980, the then US Fed chief, Paul Volcker shocked the world by increasing interest rates to an unbelievable 20% to break inflation.

Again, just before the 1987 crash, the Fed had begun increasing interest rates.

The 1994 hike cycle surprised investors in terms of the timing and magnitude of rate hikes along the way and many experts believe it led to the 1994 bond crisis.

In 2008, blinded with high oil prices, the Fed did not decrease rates in its September meeting a day after Lehman failed even though the subprime crisis was blowing up the world.

2015 marked the year when the Fed finally increased interest rates for the first time since 2008.

And now in 2022, the Federal Reserve approved its first interest rate hike in more than three years and hinted it sees six more ahead.

We can see that rising rates make sense as a potential trigger for financial turbulence.

Hence, we can see that the sharp declines we saw in the first quarter of the year may not necessarily be the only correction in the immediate future.

For a few days in April, the all-important 10-year and 2-year curve in the US bond markets inverted.

An inverted yield curve is taken by most investors as a signal for an upcoming recession.

This can be traced to the fact that over the last 70 years, every recession in the US has happened after these 2-year and 10-year curves have inverted.

We might be looking at a long-drawn bear market starting in 2022 as interest rates continue to rise.

Investing is a roller-coaster ride. Ups and downs are part of the experience.

And no one knows with 100% certainty when, and for how long, those moves will come.

But if history proves anything, we have experienced a global recession or slump every 7 years over the last 50 years.

Will 2022 be any different or does it mean it's time to prepare for a downturn?

Yazad Pavri

Yazad Pavri
Cool Dad, Biker Boy, Terrible Dancer, Financial writer
I am a Batman fan who also does some financial writing in that order. Traded in my first stock in my pre-teen years, got an IIM tag if that matters, spent 15 years running my own NBFC and now here I am... Writing is my passion. Also, other than writing, I'm completely unemployable!

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