Sunday, 3 June 2012

The Four Totally Bad Bears: New Update

This chart series features an overlay of the Four Bad Bears in U.S. history since the market peak in 1929. They are:
  1. The Crash of 1929, which eventually ushered in the Great Depression,
  2. The Oil Embargo of 1973, which was followed by a vicious bout of stagflation,.....
  3. The 2000 Tech Bubble bust and,
  4. The Financial Crisis following the nominal all-time high in 2007.

The series includes four versions of the overlay: nominal, real (inflation-adjusted), total-return with dividends reinvested, and real total-return.
The first chart shows the price, excluding dividends for these four historic declines and their aftermath. We are now at 1171 market days from the 2007 peak in the S&P 500. In nominal terms (not adjusting for inflation) over the same elapsed time, the 1973 Oil Embargo bear is our top performer, 11.9% below its peak. The current secular bear is in second at -18.3% with the post-Tech Bubble in third place at -22.9%. The crash of 1929 fared far worse at -70.6%.

However, when we adjust for inflation, the 1970s bear drops below the two 21st century bear markets. Inflation lowered the value of the 1970s contender by about 26.5% over the illustrated time frame.

Now let's look at a total return comparison with dividends reinvested. Interestingly enough, the post-Oil Embargo market is by far the top performer, up 7.3%. Our current post-Financial Crisis market is at -9.8%.

But when we adjust total returns for inflation, the picture changes dramatically. The spread between the four markets narrows, with the current market in the lead, down 18.6%, and the Great Depression still in last place, but with a statistically less grim -48.8% (those deflated dollars of the 1930s bought more).

Here is a table showing the relative performance of these four cycles at the equivalent point in time.
For a better sense of how these cycles figure into a larger historical context, here's a long-term view ofsecular bull and bear markets, adjusted for inflation, in the S&P Composite since 1871.
For a bit of international flavor, here's a chart series that includes the so-called L-shaped "recovery" of the Nikkei 225. I update these every week or two.
These charts are not intended as a forecast but rather as a way to study the current market in relation to historic market cycles.

Footnote: In previous commentaries on these bad bears, I used the Dow for the first event and the S&P 500 for the other three. However, I'm now including a pair of total return version of the chart, which requires dividend data. Thus I'm now using the S&P 90, for which I have dividend data. The S&P 90 was a daily index launched by Standard & Poor's in 1926 and preceded the S&P 500, which dates from March 1957.

Inflation adjustment is based on the Consumer Price Index.


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