The stock market may not have reached its bottom. After a sharp two-month rally, that may sound like a crazy thing to say. But history suggests as much.
The 57% fall in the Standard and Poor’s 500 Index to its March low was jaw-dropping: larger than the 48% decline of 1973-74, or the 49% fall of 2000-02. This downward move was also faster: 17 months compared to 21 and 31 months in the previous two tumbles.
Still, there have been three worse bear markets in big economies. From 1929 to 1932, the US stock market dropped 89%. UK shares fell 72% in 32 months in 1972-75. Finally, Tokyo fell 48% in only nine months in 1989-90, and 64% over 30 months. It remains 76% below its December 1989 high. (click here for graph).
The drop during the Great Depression may be the most relevant to the current situation. It came after a similar long period of optimism, brought a similar degree of systemic financial distress, and was just about as rapid. There were also some big rallies on the way down.
The scale of economic difficulties also points towards the grimmer precedents. In the US in the 1970s and in the global technology boom, the underlying problems were actually pretty mild – the oil squeeze, inflation and then a contained tech bubble.
This time, the difficulties include the huge global trade imbalance and the nationalisation of much of the US banking system. That resembles the US depression and also the 1970s UK crisis. The current massive US and UK budget deficits and monetary expansion are peacetime firsts. The scale of pre-cash financial excess is reminiscent of Japan’s real-estate and stock market bubbles. At least the world doesn’t look like it is heading towards a mess of 1930s proportions. There has been no surge in global protectionism and no price deflation in the West. Thus the bottom is probably above 170 on the S&P 500, the equivalent of 1932’s low.
Nevertheless, if history teaches lessons, they are sobering. A 70% overall market fall is possible. That would bring the S&P 500 from the current 909 down to 470.