Blogs & Comment

Has market bottomed?

Last week, stock markets rallied vigorously and so far have avoided any major plunges like we have seen in previous weeks. Has the stock market bottomed?
The S&P 500 turns up 2 to 4 months before the end of the recession according to Northern Trustand the average length of the a U.S. recession in the post-war era has been 10 months according to Bespoke Investment Management. So if the recession began in early to mid-2008, we could be near the bottom going by historical norms.
Well know when the recession officially started when the National Bureau’s Business Cycle Dating Committee makes its call. A rule of thumb is two consecutive quarters of negative growth in GDP. What can make it tricky are ongoing revisions to GDP growth figures.
Another historical norm suggesting a bottom is the typical decline seen in bear markets. Nick Majendie, a portfolio strategist at Canaccord Adamssays there have been 12 occasions since 1900 when the Dow Jones Industrial Average has been down more than 40%, and in 11 of those periods, the drop stopped somewhere between 40% and 50%.” Thats where markets were last week prior to the rally.
However, historical norms may not apply this time around considering the severity of the current financial crisis. Indeed, a recent IMF studyconcluded: Recessions preceded by banking crises last twice as long on average as those not triggered by a financial crisis, and the loss of output was about four times as great.
Bert Dohmen editor of the Wellington Letter, is bearish too: “Most bear markets, after a major bubble has burst, decline 80%-90%, going back to where the bubble started. In the United States, that’s what happened after the 1929 Crash. During the 1973-74 bear market, the broad ValueLine Index was down over 80%. In 2000-02, the Nasdaq Composite was down over 80%.