Stock Market Parallels

It seems we just closed out 2008 with a "sigh of relief"--only to find ourselves in for a turbulent 1st quarter! January went on record for posting the greatest decline in US stock market history. February ranked 3rd for the greatest decline.

During the course of one brief quarter we experienced both a bear market AND a bull market. What a rarity.

Any time a market moves 20% down from its peak or up 20% off its low, it is labeled a bear or bull market, respectively.

And if you are an investor who was rattled by the severe decline and the rumor of a Dow falling to 6,000 or lower in early March--and cashed in at that time--you missed one of the most historic rises in the stock market in the heart of March.

There are some interesting similarities today with the stock market trends of past, significant economic downturns.

Dshort.com has assembled stock market returns by superimposing the 2007-09 S&P 500 index with the Dow Crash of 1929 and the S&P 500 declines in 1973-74 and 2000-02. The current market decline is measured from December, 2007--the month when the National Bureau of Economic Research (NBER) says this recession began.

Here are some observations:

• The past declines lasted 21 (1973-74) to 34 (1929-32) months. Currently we are in month 17 of this recession.

• In many past recessions (not just the ones viewed here), the stock market has tended to recover some six months prior to the end of the recession.

• The current decline (blue line) reached its early March low point five months ahead of the 1973-74 downturn (red line). This is NOT to imply, however, that the US stock market will not again dip down to that early March point, or lower. Only time will tell.

• During the lowest point of the current decline in early March, we were 16 months ahead of the much slower decline earlier in this decade (green line).

• We are a long, long, long way from the bottom reached during the Great Depression (gray line).
  

Recently I wrote about three recession scenarios: L U V

Depending on which scenario you believe, you may be led to a certain view about when the current stock market swoon will end.

(Click on the following graph for a larger view.)