Thursday, September 17, 2009

"The Recession May Not Be Over With But The Bear Market Is" by Fred Carach

With every passing day, it is becoming more and more apparent that the bottom of the bear market occurred on March 9, 2009 when the Dow bottomed at 6547. Since that day, it has been rallying strongly. There are two very strong reasons for believing that the bear market is over. To begin this is a very old bear market.

The crash that began when the Dow reached its peak at 14,164 on October 9, 2007 is now 20 months old. The average bear market lasts 18.5 months and has an average decline of 36%. At its March 9 bottom the Dow had fallen a horrific 54% and the S&P had fallen an even more horrific 57%.

As market declines go this is the second worst market decline since 1885, a period of 124 years. Only the Great Depression decline of of 1932 was worse. It declined an amazing 89% from the 1929 peak to the 1932 low. Since 1885 their have only been nine bear markets that have exceeded 40%.

Market declines of greater than 40%

August 1896 bottom down 44%

November 1903 bottom down 44%

November 1907 bottom down 47%

August 1921 bottom down 44%

July 1932 bottom down 89%

April 1938 bottom down 46%

April 1942 bottom down 51%

December 1974 bottom down 44%

March 2009 bottom down 54%

When you look at the figures, you realize how extraordinary and brutal this crash has been. If you do not believe that, the March bottom was the low then for all practical purposes you have to believe that we are heading for a second great depression.

I just do not see how this is possible. There are just too many safety nets that have been built into the system that did not exist in the 1930s. In the 1930s, there was no FDIC insurance on bank deposits and 5,000 banks failed which crushed the economy. The Federal Reserve Board did almost nothing and did not lower interest rates, which the economy desperately needed. When people lost their jobs there was no buffer, all spending stopped.

Without spending the economy hit a brick wall. There was no unemployment insurance and there was no social security as there is today, which allows people to keep on spending even during a severe recession like this one. Lastly, there was no activist government that was willing to spend whatever it takes to keep the economy running.

Fred Carch is the author of Forty Years A Speculator.

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