By Monish Chhabra ǀ August 18, 2020

The global markets have risen by more than +40% from their bottom in March this year, to the end of July. In this article, we postulate how high can they go from here, in relation to the possible peaks of the past.

We start by looking at where the markets stand today. We draw both the developed and the emerging markets on the same graph. The orange one shows the emerging markets, with its time axis on top. The blue one is the developed markets, with its time axis at the bottom.

We super-impose the last 30 years of the developed markets (1990-2020) with the last 20 years of the emerging markets (2000-2020). This is to illustrate that the bubble in the developed markets during the decade of 1990-2000, was similar to the bubble in the emerging markets during the decade of 2000-2010. And eventually, the slope of growth normalizes for both the market over time.

The dotted blue line shows the average-trend line, reflecting the average growth over time. The top two red lines show the peak-trend lines, reflecting the peak points of the past trends. The low green line shows the bottom-trend line, reflecting the bottom points of the past trends.

The orange emerging markets graph touched the upper-red peak-trend line in February 2020, crashed down to touch the dotted-blue average-trend line, and has since bounced back to be near again the upper-red peak-trend line at the end of July.

Similarly, the blue developed markets graph touched the lower-red peak-trend line in February, crashed down to touch the green bottom-trend line, and has since bounced back to be near again the lower-red peak-trend line at the end of July.

Despite its rapid ascent and much talk about the bubbles, the market – from a statistical price point of view – is still not at any of the major peaks of the past.

We paint three scenarios below to estimate how high the markets can go from here.

To the February 2020 peak

If the markets go back to a peak similar to the one in February this year, this is what the graph looks like.

The blue developed markets graph would rise to touch the red trend line that connects the February 2020 peak. So would the orange emerging markets graph rise to the correspondingly expected level.

This would represent a rise of about +5% for the developed markets and +6% for the emerging markets, from their July-end levels.

To the Year 2007 peak

If the markets go back to a peak similar to the one in the year 2007 (peak before the Global Financial Crisis), this is what the graph may look like.

The blue developed markets graph would rise to touch the red trend line that connects the Year 2007 peak. So would the orange emerging markets graph rise to the correspondingly expected level.

This would represent a rise of about +20% for the developed markets and +25% for the emerging markets, from their July-end levels.

To the Year 2000 peak

If the markets go back to a peak similar to the one in the year 2000 (peak of the Dot-com bubble), this is what the graph may look like.

The blue developed markets graph would rise to touch the red trend line that connects the Year 2000 peak. So would the orange emerging markets graph rise to the correspondingly expected level.

This would represent a rise of about +40% for the developed markets and +50% for the emerging markets, from their July-end levels.

Two key things to note:

1) Both the developed and the emerging markets may not peak at the same time, or at similar levels relative to the past. One may rise faster, or to a higher historical peak, than the other.

2) Any possible rise won’t be in a straight line up (the graphs above are just for the ease of representation). There would be plenty of steps forward and backward, along the way.

This is a statistical exercise to assess the market’s price action, in order to get a sense of where we stand today. We are still not quite in the same territory as the peaks in the year 2007 or 2000.

It is possible for the markets to rise further by +5% to as much as +50%, before they hit the levels comparable to the past peaks. We won’t be entirely surprised by either of those outcomes, or anything in between.

Keep an eye on the probabilities of various paths. And wherever one may seem to be - pick sensibly, carry suitable weights and be balanced.