While it is notoriously challenging and mostly futile to predict the precise path of anything in the future (e.g., weather, sports, eschatology, financial markets), it is thankfully much easier to look back in the history and compare. In that vein, I found a couple of interesting pictures of the U.S. stock market at Doug Short's website. (Click on these charts for the latest versions, as they are updated daily.)The chart above tracks the progression of the current "bear market" (in blue), starting from October 9, 2007, relative to three other periods of protracted downturn in the U.S. stock market. It shows that the cumulative drop in the stock market over the past 14 months is roughly comparable to the magnitude of maximum drop experienced during 1973-74 first oil shock and 2000-2002 dot com bust, but we have suffered greater acceleration in the speed of decline since this summer, mostly due to much more tangible concerns about the health of the financial companies around the globe and the potential negative knock-on impact on the economy. The optimists can argue that we are pretty close to the bottom, if the current business and financial cycle proves to be similar to 1973-74 or 2000-2002. The pessimists can argue that there is still a long way down, pointing to the Great Depression era.
Those brave investors with a longer-term vision should take a look at the chart below which shows the stock market since 1950. Ignore for the moment the precisely drawn red trend line (which, despite what it appears, is not the average growth rate because this chart is drawn on log of 10). Two takeaways for me are: a) the stock market does a reasonably good job in reflecting macroeconomic conditions, as the market's troughs have occurred during or near recessions and b) the long-term trend for the stock market has been positive, at least since 1950, despite many periods of sustained downturn. That is something to be cheerful about, I think.
