This post updates a comparison of the rise in the Dow Jones Industrials index from its March 2009 low with increases after six previous bear markets involving a peak-to-trough fall of about 50%. (The Dow declined by 54% between October 2007 and March 2009.) As explained below, the current level of the Dow is slightly above the top of the range spanned by these prior rises.

The six bear market troughs considered in this analysis occurred in November 1903, November 1907, December 1914, August 1921, April 1942 and December 1974. The Dow Industrials fell by between 45% and 52% into these lows. (The 1929-32 bear market was excluded because it involved a much larger decline, of 89%.) In each of the six cases, the trough of the bear market was rebased and shifted forwards in time to align with the March 2009 low. The subsequent rises were then traced out and an average calculated – see chart.

The current rise broadly tracked the “six-recovery average” until late 2011 but has since diverged positively, standing 39% higher as of yesterday’s close. The average remains below the current Dow level through end-2019.

The Dow is 4% above the top of the range spanned by the prior rises. The range top is defined by the “roaring twenties” increase from the August 1921 trough – black line in chart. The equivalent month to August 2014 was March 1927. If the Dow were to replicate its performance then, it would rise to 18,000 at end-2014 and 22,000 at end-2015 en route to a peak of 39,000 in January 2017, corresponding to September 1929.

As noted, the 1929-32 bear market wiped out 89% of the Dow’s peak value, returning it to the equivalent today of 4,000.

The historical analysis, therefore, suggests that the Dow will trade significantly below its current level at some point over the next five years. A further substantial rise first, however, cannot be ruled out.

The “monetarist” perspective here is that bear markets are normally triggered by money supply expansion falling short of the needs of the economy – such a shortfall crimps future activity and is associated with a withdrawal of liquidity from markets. Annual real narrow money growth moved well beneath industrial output expansion from late 1928, signalling a deteriorating liquidity backdrop. The real narrow money / industrial output growth gap remains positive currently, both in the US and globally.