Dow history suggests duller equity market prospects
Simon Ward
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The Dow Jones industrial average fell by 54% from peak to trough in the bear market between October 2007 and March 2009. The Dow has declined by 45% or more on seven prior occasions since 1900 – see table. Six of these declines were in the 45-55% range, the exception being the depression bear market of 1929-32, when prices dropped by 89%.
The Dow reached its low on 9 March 2009 and had risen by 61% by 9 March 2010. This is in the middle of the 42-85% range of first-year recoveries after the six prior big bear markets, excluding the 1929-32 decline. The mean rise across these recoveries was 59%.
The Dow's performance was mixed in the second year after the troughs of these prior cycles. The change in prices ranged from a fall of 8% to a rise of 22%, with a mean increase of 7%. In one case – the recovery after the 1973-74 bear – a strong second-year gain followed a below-average rise in the first year.
Historical evidence, therefore, suggests that equity markets are entering a less dynamic period, although any downside risk should be modest against the background of a continuing economic recovery. This conclusion is consistent with evidence of less favourable global liquidity conditions discussed in yesterday's post.
| Dow Industrials bear markets compared | ||||
| Duration | Magnitude | Change | Change | |
| first year | second year | |||
| months | % | % | % | |
| June 1901 - November 1903 | 29 | -46 | 59 | 22 |
| January 1906 - November 1907 | 22 | -49 | 65 | 13 |
| November 1909 - December 1914 | 61 | -47 | 85 | -3 |
| November 1919 - August 1921 | 22 | -47 | 56 | -8 |
| September 1929 - July 1932 | 34 | -89 | 156 | -8 |
| March 1937 - April 1942 | 62 | -52 | 44 | 2 |
| January 1973 - December 1974 | 23 | -45 | 42 | 17 |
| October 2007 - March 2009 | 17 | -54 | 61 | |
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