History Is Neither Bunk nor Bible
It may be premature to start planning for a sustained stock market rally, but it's never too early to look for perspective on what's in store for the future.
We've been collecting odds and ends that lend a bit of insight into matters cyclical, including the burning question: When will the bear market end? In terms of declines, the current tumble (as of Nov. 20) was the deepest in the post-World War II era, based on the S&P 500, according to analysis by Crandall, Pierce & Co. The average bear-market loss: just under 35%. The best outing, as post-WWII bear markets go, was a relatively mild 22%.
Before the latest rally, in late November, the year-to-date loss in 2008 for the S&P at one point exceeded even the 43.3% total return selloff of 1931, according to Morningstar's Ibbotson division. It's anyone's guess if we'll ultimately end up in record negative territory once this year's final trade prints. Yes, there are only 14 trading sessions left to 2008 after today, and as of last night the S&P 500 was off by less than 40% on a total return basis. Painful, to be sure, but a bit better than the year-to-date loss of 47.7% as of November 20's close.
Speaking of which, how long do bear markets generally last? The longest since WWII: 3.0 years, Crandall Pierce advises. The current selloff is about 1.2 years old at the moment, slightly below the 1.4-year average. The shortest was almost a blink of the eye at tender youth of just 3.3 months.
Now for the main event: recovery. Once the rebound begins in earnest, the first week averages a 7.5% gain, again citing data from Crandall Pierce. Here's how the S&P 500's average bull market gain stacks up over longer periods off the bottom post WWII:
* 1st month: 11.7%
* 3 months: 16.4%
* 6 months: 22.6%
* 1st year: 37.1%
* 2nd year: 54.4%
* 3rd year: 55.2%
Alas, the financial gods don't make announcements at the bottom. Only hindsight can definitively spot troughs, leaving mere mortals to guess in real time. Educated guesses, perhaps, but guesses just the same. So it goes with short-term forecasts.
It's tempting to think that reasonable minds can piece together the bits and pieces of evidence to figure out where we are in the cyclical. Indeed, there's a large cottage industry dedicated to just that pursuit. But as a recent essay by the Hussman Funds' Bill Hester reminds, such tasks are tougher than one might expect.
Consider the ebb and flow of S&P 500 operating earnings in relation to the end of bear markets and recessions. "It's best to tune out any forecast for the performance of next year's stock market that is based on expectations for near-term earnings growth," Hester counsels. "There's almost no correlation between year-over-year earnings growth and stock market performance."
The numbers tell the story, Hester continues. Comparing the nine bull markets since 1953, he observes a wide (read: random) array of trends in the changes of S&P 500 operating earnings during the first two years of newly minted bull markets. The quickest and biggest earnings recovery came in the two years following the 2001 recession. "This instance is unique because that bull market began almost 16 months after the recession ended (partly because valuations were still unattractive at the end of the recession)," he notes.
Impressive, but hardly typical. Seven of the nine earnings recoveries over the past 50 years were uninspiring in varying degrees. Particularly discouraging was the 20% fall in operating earnings for the S&P 500 even two years after the 1990-91 recession, which was one of the shortest on record.
The point is that earnings have been known to rise (or fall) for many months after a recession's run its course and the stock market's rebound is in full swing. Trying to figure out which scenario Mr. Market has in store this time around is one more reason to remember that investing's still as much art as it is science. Alas, all financial artists aren't equally endowed with talent, which is why there's a case for keeping at least a portion of one's long-term equity exposure in a buy-and-hold pattern over time.
Yes, there's a compelling case for dynamically adjusting one's equity allocation over time, depending on the signals du jour, such as dividend yields.
But betting the farm on market timing carries its own set of risks. And as the above stats remind, if you miss the first few months of the rebound, you're likely to miss out on a lot. Caveat emptor.
Related Articles
|
Top Rated Comment Streams:
-
1.Hedged In661
- 2.
-
3.Smarty_Pants398
-
4.cos1000307
-
5.axelrod608294
- Free E-Newsletters
- About Seeking Alpha
- About Us
- Contact Us
- What's New
- Readers Feedback
- Advertise With Us
- Contributors
- Contribute an Article
- Feature Your Book
- Our Contributors
- Anonymous Contributions
- Dispute an Article?
- Legal
- Terms of Use
- Privacy
- Copyright
This article has 11 comments:
-
a believer
-
51 Comments
Dec 04 04:39 PM"Planned Parenthood offers gift cards"
Proof positive that we are headed for THE Great Depression.
Think about it!
-
Chris B
-
567 Comments
Dec 04 04:54 PMIs it appropriate to look at US market history alone and draw conclusions about the longest possible bear market? How long did Japan's bear market last? It's been zig zagging mostly downward for two decades now and is now at early 1980's levels. Oversold? Then why wasn't that also the case 15 years ago?
Things that never happened before happen every day and you have to do some fishing to see much repetition in history. Continued US prosperity is an assumption that everyone is making. Think about that.
-
RandyRuiz
-
4 Comments
Dec 04 06:02 PMOn Dec 04 04:54 PM Chris B wrote:
> "Speaking of which, how long do bear markets generally last? The
> longest since WWII: 3.0 years, Crandall Pierce advises. The current
> selloff is about 1.2 years old at the moment, slightly below the
> 1.4-year average."
>
> Is it appropriate to look at US market history alone and draw conclusions
> about the longest possible bear market? How long did Japan's bear
> market last? It's been zig zagging mostly downward for two decades
> now and is now at early 1980's levels. Oversold? Then why wasn't
> that also the case 15 years ago?
>
> Things that never happened before happen every day and you have to
> do some fishing to see much repetition in history. Continued US
> prosperity is an assumption that everyone is making. Think about
> that.
-
Reinko
-
346 Comments
Dec 04 06:17 PMThe tone of the article suggests that the author thinks we are only in recession mode but there is no proof for that whatsoever.
It could also be depression mode although in the Treasuries there is still an giant amount of money found that needs to be burned away before true depression could sink in.
To RandyRuiz:
Don't forget it was the atomic bomb that did miracles to the US$ as a reserve currency in the long run. And it took a long long time since the start of the previous depression before the USA gained world leadership via the atomic bomb.
These decades are just so different, of course some part of US tech will have great worth in the future, but feeding more of the US obisity is not a wise investment for the foreign nations. They better feed their own populations and wait and see how things pan out in the USA.
-
investor88
-
748 Comments
Dec 04 06:21 PMIf we have any strong reason to believe Dow 3k eventually or something like that, then it is better to short some rather than long some. The key is "strong reason", each has to shift through the facts and make a decision which is art and science indeed!
-
RandyRuiz
-
4 Comments
Dec 04 07:22 PMI am not sure I agree with the Atomic bomb theory as the only reason. Nothing in History is as easy as a single driver. However I would say that in all cases the catalyst for the next driver of American dominance was not obvious until the next boom was well under way. The U.S. has a cultural advantage on most if not all other cultures in the realm of innovation (In My Humble Opinion). Innovation ultimately determines the dominant players of a given time frame(Again in my humble opinion). We still have a huge advantage in spite of our current problems.
I would also say that the rest of the world will suffer equally or most likely worse than we will. China will not excluded from the coming depression. China is also not as structurally prepared as the U.S. to weather that storm. (Yuan is not a reserve currency, Industrial output is TOTALLY reliant on U.S. demand, no real social backstops FDIC, Social Security, Unemployment benefits, blah, blah ). I would say they are in for a rougher ride than we are.
In short, a really bad time is at hand for the world. It may take a decade or longer to regain the current level of economic activity. However I wouldn't count the U.S. out as the Major player on the world stage just yet. We still have the most competitive people in the world being imported here and being grown here.
To every one on this board who is predicting the end of the world because of the impending depression, I have a message for you. Man up, adapt, and get your ass in gear. This is EXACTLY the call to arms that has gotten America in the game to kick ass time and time again in the past. It is almost as if America needs these moments to get her to rise to her potential. So lets quit the fatalistic whining and lets figure out how to turn this around and make money.
On Dec 04 06:17 PM Reinko wrote:
> To Chis B:
>
> The tone of the article suggests that the author thinks we are only
> in recession mode but there is no proof for that whatsoever.
>
> It could also be depression mode although in the Treasuries there
> is still an giant amount of money found that needs to be burned away
> before true depression could sink in.
>
> To RandyRuiz:
>
> Don't forget it was the atomic bomb that did miracles to the US$
> as a reserve currency in the long run. And it took a long long time
> since the start of the previous depression before the USA gained
> world leadership via the atomic bomb.
>
> These decades are just so different, of course some part of US tech
> will have great worth in the future, but feeding more of the US obisity
> is not a wise investment for the foreign nations. They better feed
> their own populations and wait and see how things pan out in the
> USA.
-
nmelendez@prw.net
-
173 Comments
My Website
Dec 04 10:00 PM-
RandyRuiz
-
4 Comments
Dec 04 10:18 PMThe USSR also looked very impressive in the initial stages of their development, they made it to space before we did remember? But in the long run the failed because of their governing and economic model. China is still ruled by a communist regime. Yes their economy has capitalistic aspects but they are no U.S. Not by a long shot.
In spite of the current size and intrusion of our government I still believe that we are the freest economic power in the world and will still be so after the depression is over.
I respect Jim Rogers as an investor and a strategist but I think in this race he is backing the wrong horse.
On Dec 04 10:00 PM cruiser9805 wrote:
> China is only beginning. They have pegged their currency to ours.
> They have over 1.4 trillion in US reserve. You do not think they
> can borrow against that? Do not forget, they are also diversifying
> into gold and other reserves. While we got -.5% GDP they're at a
> poor old 7%GDP. Wow, they really are hurting. They are also buying
> up commodities all over the world dirt cheap. Personally, i am betting
> on them...not against US, just that theyre economy will continue
> to grow right thru our disasters.
-
Anthony Alfidi
-
154 Comments
My Website
Dec 04 10:25 PMLarge hedge fund managers like D.E. Shaw and Farallon have announced asset lockups for the first time in their history. This is an ominous sign that many hedge funds formerly considered top performers will be forced to unwind positions in liquid assets to meet redemption demand. This is all BAD for stocks!
-
Olaf Svenson
-
1 Comment
Dec 05 10:32 AMOn Dec 04 06:02 PM RandyRuiz wrote:
> Think about this. The end of the US and its dominance in world affairs
> has been prognosticated at every recession/depression since the 1870's.
> If you don't believe me google for it. I have no Idea what the future
> holds for this country but what I do know is that the worst investment
> has been one against the U.S.
>
> On Dec 04 04:54 PM Chris B wrote
Zis country has seen over sixty years of unprecendented prosperity.
The majority of folks of the current generation don"t have a clue as to the experience of going hungry,days at a time and being forced to sleep outside! No employment of any kind etc.
This is the USA and such things don't hapen here?
If we are to maintain our freedom, there isn't miuch the Government can do to alleviate the hardship.
Diciplned folks will have to manage financial affairs.
The whole trouble can be traced to a lack of financial discipline by masses who ought to know better!
My feeling is it will get worse before it gets better. As my Paw liked to say, and he survived the great depression that started in 1929;" A lot of folks just can't stand prosperity."
We have met the enemy and he is us!!!!
-
Chris B
-
567 Comments
Dec 05 02:50 PMWe also have a social disaster looming, as the baby boomers retire penniless and demand government welfare from their children's generation (to afford the mcmansions).
Parts of the US were an ecological disaster once too. We once had a river so polluted it caught on fire! LA is almost as smog covered as much of China. Google the love canal debacle.
I cannot resolve the "slave labor" comment with the statistics that the Chinese have one of the world's highest savings rates. How do slaves save money? Are low wages indicative of slavery?
Meanwhile, government accounts for over 20% of our economy. How about China's (look it up)?
On Dec 04 10:18 PM RandyRuiz wrote:
> China's Dollars dont make up for thier model of central planning.
> They are building ghost cities with five star hotels that no one
> will ever stay in.