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Speculative Bubbles Are Often Followed by Years of Below-Average Investment Performance

The Japanese stock market has still not recovered following the market peak that developed between 1989 and 1990.

Figure 1.2

Figure 1-2 Fifteen years of underperformance following the peak of the Japanese bull market.
There have been numerous trading opportunities in the Japanese stock market since the peak of its speculative bubble as 1989 drew to a close, but longer-term investors have not had an easy time.

Figure 1-2 shows the Standard & Poor’s 500 Index aligned below the Japanese Nikkei Index in such a way that their peaks and prepeak periods align. The similarity of these two markets is actually quite striking. If the Standard & Poor’s 500 Index were to follow the path of the Japanese stock market, a full market recovery would not get under way until at least 2010.

This would not be unusual. Gold reached a peak level of approximately $800 an ounce during a final buying panic during the late winter of 1980. Prices remained below $500 an ounce through most of 2005—a full 26 years after—before rising during the first four months of 2006 to above $650 per ounce.

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