The Investment Scientist

Posts Tagged ‘Dow Jones

My name is Dow. I was born in May 1896 to my father Charles Dow.

In 1900/1/1, I was 66. No, that was not my age, but my level.  People care about my level since the higher it goes, the richer they get.

In the first two decades of the 20th century, I wobbled around: 100% up and 50% down was the norm of the decades. Nevertheless, I ended the two decades at 108.

Dow 1900-1920

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clown“It is a tale told by an idiot, full of sound and fury, signifying nothing.” – Shakespeare

Yesterday, the Dow passed 10,000 again. Predictably, the press kicked up a big storm about it.

Even a relatively unknown like me got a call from a major newspaper asking me to comment whether this was a sign that the market would keep going up. I really struggled to answer. I knew that if I could spin a good story, the reporter would come back to me for more and more comments. Pretty soon, I would look like a stock market guru to my clients and prospects. This would surely be a win-win for me and the newspaper – if only I could bring myself to pretend.

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It’s official. On July 9, US stocks slid more than 20% from their October high, sending the S&P 500 into bear market territory. Even earlier this month the NASDQ and Dow Jones turned bearish following the Russell 2000, an index of small caps, which lead the decline.

How long will this bear market last?

Well, I don’t have a crystal ball, but I do have a rear view mirror.

Since 1960, there have been ten bear markets (see Table). The worst bear market took one-and-a-half years to reach bottom. Four reached bottom within a month. The remaining five hit bottom between one and ten months. On average, it took 4 months to reach bottom.

Date of entering bear market Months to bear bottom 1 year return from entry 3 year return from entry
2/26/2001 19 months -11% -8%
10/8/1998 < 1 months 38% 12%
10/17/1990 < 1 months 33% 59%
10/19/1987 2 months 3% 13%
3/1/1982 5 months 34% 63%
3/6/1978 < 1 months 13% 49%
12/10/1973 10 months -32% 9%
1/26/1970 4 months 10% 35%
10/3/1966 < 1 months 28% 24%
5/28/1962 1 month 20% 51%
Average 4 months 14% 31%

Data source: Moneycentral.com

Now that we are in a bear market, shall we move to cash?

I don’t recommend it. Here’s why. From the day the S&P 500 entered a bear market, on average it returned 14% in one year and 31% in three years.

Let’s look at the distribution of returns. This is important. Among the ten one-year returns, two were negative, yet three were over 30%. As for the three-year returns, only one was negative but three were over 50%!

I don’t know about you, but I like those odds.


Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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