*Missed Calls

1996: Accounting Distortions and the Dot-Com Era

In 1996, our models issued a cautious signal anticipating a downturn in corporate tax-return profits beginning in 1997. This projection preceded then-Federal Reserve Chair Alan Greenspan’s well-known “irrational exuberance” speech by several months. Our forecast proved correct: tax-return profits declined steadily from 1997 to 2001.
However, reported S&P 500 shareholder earnings diverged from reality, inflated by phantom sales and widespread accounting irregularities—issues that only came to light later through scandals involving companies such as Enron and WorldCom. Under normal circumstances, equity prices should have remained relatively flat from 1996 to 2000. Instead, market participants followed these distorted earnings into a bubble phase. We adapted by incorporating shareholder earnings data into our model in early 1997, allowing us to participate in the subsequent market rally.

2022: Pandemic-Related Market Distortions

In 2022, our composite indicator did not generate a sell signal prior to the market’s downturn. This anomaly was the result of unprecedented pandemic-related disruptions, during which monetary policy, economic cycles, and market cycles became desynchronized due to large-scale government interventions. The economic cycles have since returned to a more normal pattern.

INDICATOR SIGNALS from Sector Analysis reports published by A.G. Becker, Shearson American Express, Lehman Brothers, and Garzarelli Capital. (Audited results by Coopers & Lybrand from published reports). Each year’s explanation is available upon request.