Closing the Book on 1981 Analog

I have written here twice before about the pretty amazing resemblance of the stock market in late 2024 to that of late 1980.  Those earlier stories are linked below.

It was a really fun analog while it lasted, but now it is time to close the book on that story.  We are not repeating the stock market of early 1981, just after President Reagan was inaugurated.  This breakup of correlation happens to all analogs eventually, and in my personal experience they usually fail right at the moment when I am most counting on them to keep working.  This is especially true if I decide to write about them and share them publicly.

The current plot of the SP500 was tracking almost perfectly with the 1980 pattern from about mid-April 2024 to late December.  The supposition was that the stock market was expecting that the outcomes of a (formerly presumptive) Trump victory would match what happened when Reagan won in 1980.  And that was a good presumption for several months, right up until it suddenly wasn't.

If you squint hard enough at the chart above, you can still see some faint signs of correlation between the two patterns, but that is not enough to trade by.  The stock market since Trump was inaugurated on Jan. 20, 2025 has held up much better than the same period after Reagan was inaugurated on Jan. 20, 1981.  It is fair to note that there are big fundamental differences between then and now, most notably that we do not have double-digit interest rates from the Fed now like we did in 1981.  But that is not the only factor which drives the stock market.

The stock market is driven by two main factors: (1) How much money is there? and (2) How much does that money want to be invested?  Change either of those, and prices move.  And sometimes they move in familiar ways, based on repeating patterns in both (1) and (2).  But not forever.

If there is any residual correlation left in this relationship, then we can look forward to the echo of the Feb. 20, 1981 price low.  But that does not necessarily mean a low for the stock market on Feb. 20, 2025, because part of how analogs often break up is that they first start manifesting inverse correlation, before losing correlation altogether.  We cannot count on an inversion of the Feb. 20, 1981 bottom, but it is a possibility.

The two main points to take away from this comparison are that first, price pattern analogs can never be trusted completely.  And second, this is all the more true once we see the correlation start to slip away.

Someday there will be another fun pattern analog that will come along, which we can smile and enjoy while it lasts, knowing that it too will eventually fizzle.