Saturday, November 22, 2008

Time Bandit

Little did we know, the US equity markets would return to 2002 levels last week. Although the markets staged a late day rally on Friday, the Dow finished the week down another 5%. This brings the yearly performance to -41%.

Six years of progress has essentially evaporated in a few short months due to our nations credit consumption mentality (individuals and corporations). Thus, confidence in government leadership and corporate America is extremely low.

All is not lost though. A recent quote from Economist Allen Meltzer puts things in perspective:

"Capitalism without failure is like religion without sin - it just doesn't work!"

Let's look at a few statistics courtesy of Ned Davis Research pertaining to market declines in the Dow Jones Industrial Average from 1900 through 2007.

  • "Moderate" Corrections (10%+ loss) have occurred 117x since 1900.

  • "Bear" markets (20%+ loss) have occurred 31x since 1900.

  • The average duration for both of these markets is 106 days and 367 days, respectively.

  • The average duration is 1.1x per year and 0.3x per year respectively.

So, where do we stand now? The current market decline started in October 2007 when the Dow was trading at 14,000. The average bear market duration of 367 days has now been surpassed. Nobody knows when the tide will turn. But, we do know bear markets have occurred before and unfortunately, they are part of the investment process. There has never been an event we didn't survive and the capital markets at some point will turn in anticipation of the economic recovery.

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