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Looking down on Elvis’s grave in the seminal rockumentary This is Spinal Tap, lead guitarist Nigel Tufnel muses: “It really puts things in perspective, though, doesn’t it?” “Too much perspective,” the band’s singer replies. Investors may feel similarly unnerved when comparing the current collapse in equities with bear markets past.
Historical chart-gazing, of course, is a questionable hobby. Every age is unique: the downturn today is happening in a world very different to that of the early 1970s, let alone of the inter-war years. Still, other methodologies have, frankly, fared little better. Investors who bought the Dow Jones Industrial Average in the New Year because it was cheap on an earnings basis have lost a quarter of their money. So, what do the charts tell us about this latest slump?
First, if markets feel harsher than during the oil and dotcom crises – that is because they are. Not only has the Dow fallen further this time, it has achieved the milestone of roughly halving in 16 months, compared with 21 months for the 1970s crisis.
At the end of the tech boom the Dow took twice as long as this slump to fall 49 per cent. Ominously, today’s bear market is pretty much keeping up with the 1929 crash, although the Dow then almost halved in a quarter, before temporarily rebounding.
It is sharp and painful, then – but how long will this bear market last? Again, perspective may cause unease. A rosy interpretation of the charts might be that the brutal correction points to a quicker recovery. Perhaps. Against that, the Great Depression weighed heavily on equity markets for almost three years, with the Dow ending 90 per cent lower. Japan’s Nikkei 225 index took six times longer than that to find a floor.
That would be a depressingly long wait. Still, agile traders might be able to make a buck here and there. The 1929 crash had bounces that lasted a quarter or so. Japan had four rallies longer than a year. In the end, though, investors were better off sitting on the sidelines. Perspective indeed.
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