US stocks extended relative to history
Simon Ward
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The chart updates a comparison of the rise in the Dow Jones industrial average from its low on 9 March 2009 with recoveries after six prior bear markets of a similar scale to the 2007-09 decline. A post in February gave further details but the analysis involved:
1) Identifying twentieth-century stock market falls comparable with the 54% decline between October 2007 and March 2009.
2) Aligning the trough of each identified bear market with the March 2009 low and tracing out the subsequent recovery.
3) Calculating a mean of these levels at each point in time to generate a “six-recovery average” path, with which to compare the current advance.
The Dow has moved even further above the six-recovery average since February, with the premium standing at 21% as of Friday’s close.
One of the six prior recoveries involved stronger stock prices at this stage – the recovery after the November 1903 low. This precedent is not encouraging since stocks soon after embarked on another bear decline into a low in November 1907.
The current Dow reading, indeed, is above the mid 2012 levels of all six prior recoveries.
The predictive value of such comparisons is moot but the suggestion that stocks will decline by mid 2012 is consistent with the monetary forecast of a peak in global growth in May – see Friday’s post. As noted there, however, it may be premature to position defensively until a growth peak is confirmed by leading indicators and “excess” liquidity gives a “sell” signal.
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