13th October 2010
The analysis by Simon Ward, economist at Henderson Global Investors, notes that the Dow Jones industrial average fell by 54% between October 2007 and March 2009.
Historically, there have been seven declines in the Dow of 45% or more during the last century.
As the table below shows, six of the seven were in a range of 45-55%, the exception being the 89% fall between September 1929 and July 1932.
Ward has excluded the abnormally severe drop of 89% and focused on how the Dow's recovery from the latest crisis compares against the other six major drops – the ‘six bears' – as the magnitude of the decline among this group are of the same order.
He began the analysis earlier this year in May, looking at how the recovery in the Dow from its trough on 9 March 2009 compared with the rallies following the six prior bear markets, excluding the 1929-32 decline.
The low of each bear was rebased and aligned with the March 2009 low point and the chart shows mean performance (in blue) and the range (in grey) across these prior falls and recoveries.
At the time of his original analysis, the Dow had been mostly ahead of the six-bear average since the March 2009 low, sometimes even straying sharply above the range spanned by the prior rallies.
Ward believes this outperformance of the Dow versus the six bear average and, at times, range, may reflect the unprecedented monetary stimulus launched by the Federal Reserve and other central banks amid the post-Lehman crisis.
Furthermore, the October 2007-March 2009 decline was slightly larger than the average (54% versus 48%), possibly contributing to a stronger recovery.
Since the initial round of quantitative easing, however, the liquidity backdrop has been deteriorating.
Indeed Ward says that with cash being held by central banks has been reducing recently and the prospect of further QE in the US pretty much priced in, Dow has been converging with the six-bear mean. Indeed the likelihood of a further round of easing by the US Fed has increased, as indicated by this report by The International Business Times.