An earlier post made a case for comparing the recent decline in US share prices with the bear markets of 1906-07, 1919-21 and 1973-74. Like the 2007-09 bear, the falls in 1919-21 and 1973-74 occurred at or near the end of 30-year economic cycles. Meanwhile, the 1906-07 decline was associated with a financial panic with similar characteristics to the Lehman crisis.

The three earlier declines bear a close resemblance, with the Dow Industrials index falling by 45-49% over 22-23 months. The subsequent recoveries also look similar – three years after the start of its decline, the Dow had rallied to stand 17%, 17% and 13% respectively below its peak level.

The earlier post included a chart overlaying the 2007-09 decline on the three earlier bear markets and recoveries. This approach has been taken further in the chart below, which shows a "three-bear average" of the prior episodes. This average provides a template for comparison with current developments; it may also offer guidance on share price prospects.

The Dow peaked in October 2007 and followed the three-bear average closely until September last year, when the Lehman crisis led to a dramatic lurch down. The deviation widened in early 2009 as fears of banking system nationalisation exacerbated weakness. The rally since March, however, has closed the gap and the current level of the Dow is now only marginally below the template.

The average declines further over the summer, reaching a low about 10% below yesterday's Dow close at the start of September. It then embarks on a sustained rise, climbing 25% from the September low by the end of 2009 and a further 27% during 2010.

Historical comparisons should be treated with caution but the shape of this "forecast" appears plausible. The recent rally has been driven by a reallocation of cash to equities by investors who had been underweight; a period of consolidation may be necessary before a further advance based on a recovery in corporate earnings – conditional, of course, on the global economy returning to growth later in 2009.