Thursday, May 14, 2009

Are We Headed in the Right Direction?

A few months ago, just after we started this blog, we posted an audio-slide presentation entitled "Where Do We Go from Here?" (this links to the original presentation without the audio commentary, because many people had trouble downloading the original version - gotta love technology.)

One of the premises of the presentation was that we need to understand history in order to have some perspective about our current economic mess.  We said that over the past century there have been two periods with market losses as dramatic as what we have experienced since October of 2007: the Great Depression of the 1930's and the 1973-1974 bear market.  

We showed several graphs comparing these two periods with our current market losses.  The chart below is an update of one of those graphs.  (If you click on the picture, you will see a larger version)

The graph shows a 32 month period, which is how long it took the market to bottom out during the Depression.  When we first showed this graph, the current market was down to $0.47 (meaning every dollar invested at the peak was then worth only 47 cents.) This was worse than both prior market downturns after a similar 16 month period.

What we see now as that the $0.47 has risen to $0.58, close to the bottom reached in 1974 and slightly better than the Depression after 18 months.  

In the initial presentation, we said there is reason to believe this market will be more like the 70's, where markets returned to their pre-crash levels after about 36 months, than like the Depression where after 32 months every dollar invested at the peak fell all the way to 15 cents.  This rational was based both on the aggressive government reaction to the current crisis, as well as our belief in the innovative strength of the US economy.  

So we are now two months out from the lows reached in early March, and the picture is getting a bit clearer.  It looks like we may have avoided the Great Depression II, now we have to see how long recovery will take and how robust it will be.