The Worst Is Likely Behind Us 26 comments
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To get some perspective on the current market conditions, it may be helpful to look at what some bear markets of the past have looked like.
Below is a chart that goes back to 1940; as you can see, what we’ve recently gone through was the second-worst five-day period of time over the last 68 years. It was essentially a market crash. The only other thing that's really even close was the crash of 1987.
This past week you’ve seen how the markets react after a crash or after a very traumatic period in the market. They go up, they go down, they chop around. They build a base, but it's not a V shaped recovery. These are U shaped recoveries. They take time to develop, and there’s going to be a lot of volatility between now and when that next bull market starts.
It would be very unusual to take off from here and just have a V-shaped recovery. The more likely scenario is what we've seen in the past, where you have very sharp rallies accompanied by very sharp falls. We're poised to take advantage of that type of environment.
For the past 52 weeks, the S&P 500 is down more than 40 percent. The only period that was worse was the 1974 bear market, and it was worse by just a percentage point or two.
There is a positive side of all of this sour news – what goes down eventually goes back up. Conditions are ripe for mean reversion, which is a critical element of how we think about markets. We’ve been in one of the worst markets in the last 70 years over the last year, but the prospects for a rebound going forward, at least based on history, are still pretty strong.
On the chart below, I’ve tried to capture the top of the market back in 2000. To do that, I’ve used a rolling eight-year rate of change. You can see that we’re experiencing the worst eight years since 1940.
When you look at this historic chart, you can see periods of underperformance and periods of sub-par returns. This was the case in the '40s during World War II, for instance. But then, what happened? Big rallies and big selloffs.
There were strong rallies in the '50s and '60s, and then the market went through a tough period of time in the '70s. After that we had agreat bull market in the 1980s and '90s.
Now, when you look at current markets, you see that this has been a terrible period of time. However, mean reversion tells us that there’s a good chance that over the next decade or so, there are going to be returns similar to the 9 percent to 10 percent returns we've averaged since 1929.
As difficult as things are now, we believe this is about as bad as things will get and the outlook going forward is much more positive.
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This article has 26 comments:
We're in a deflationary spiral. How can you possibly think the worst is over?
Yes we will see rallies, and the smart patient investor will continue to buy at lower levels and sell into these rallies. however I do not see a strong return to growth in the stock market until 2017 at the earliest.
Drive around and see who's going out of business in your neighborhood. I see long established stores closing or consolidating while laying off employees. 700 car dealerships are projected to close this next year. People on the street and I don't mean Wall Street, are worried to death. Those who have to count their pennies at the grocery store have changed their shopping habits. And it goes on and on.......
Just like a year ago when the " R" word was only whispered, today it's the "D " word.
if there is nothing to fear but the fear itself then you will never be free until you believe.
CLH, I'll mark six months from now in my calendar. We can remind each other what we said today.
it is has a large amount of variance in it, it's a volatile little market. take a longer term view perhaps? are you just looking for the negative reframe of it? how bout looking at it with a positive reframe?
find the reasons it can first. then when your not frieking out and are calm. logically evaluate the market and use your best judgement.
be greedy when others are fearful right?
doesn't productivity rise about 2% a year? 1.02 ^10
Therefore, the rally at the end of October to 38% of the October drop (in the DOW) looks more like a bear market rally than a turnaround. [Those of you who know or use fibonacci know that 38% is the first critical level to be met. (After that comes 50% and then 52% retracement.)] We'll probably see this week if 38% holds, which would give a bit more, but not complete, hope that the bottom is in. I believe we will test the bottom again before finding a final bottom. If the mid October bottom doesn't hold, forming a double bottom, then it is almost certainly probable the DOW will have to find another low in the mid to low 7,000s.
I am encouraged by your belief that "this is about as bad as things will get and the outlook going forward is much more positive". Thank you for the good research and good reasoning that is based on the "regression to the mean" theory.
However, for real cases (not statistically averaged) it can be painful, very painful. And that may possibly be true for the next 2 -3 years.
Optimism in the face of advertsity is noble; optimism in the face of catastrophe is foolhardy.
This is new. This is different. This is history being made. The top 20% will be OK. The rest are about to sink into a depression that will make the '30's lok like a bad night at Bingo.
Kingsdale's Article dated October 31st 2008
Meanwhile, OctoberDream said he backs your stance.