This article is a guest contribution by Doug Short (dshort.com).
How does the current Dow recovery compare with major recoveries in the past? The chart below overlays the first 500 days of sixteen recoveries in the Dow Jones Industrial Average since its creation in 1896. I'm counting market days, so each recovery is truncated to approximately two calendar years. At present we are 346 market days beyond the March 2009 low.
The next chart is based on Dow daily closes with the sixteen rallies highlighted. Since the first chart is limited to 500 days, this chart offers a cross reference to get an idea of the ultimate length and gain of the rallies and also when they occurred in the larger historical context.
Recovery Selection Process
My initial selection criterion was to overlay all the Dow rallies following a 30% or greater decline. Using the traditional 20% decline associated with bear markets would have made the chart too busy, and it occasionally runs against conventional wisdom. For example, the Tech Crash in the Dow consisted of 3 baby bears (if you round up the 19.91% decline in January-March 2000) separated by two rallies over 20%. I consider it a single bear market with a decline of 37.85% and thus included the rally that began in 2002. I also treated the Crash of 1929 as a single bear decline, even though the 20% rule would have divided it into six bear markets with five intervening rallies. Likewise, and more to the point for the overlay, I treated the rally after the 1932 low as a single rally, even though the 20% rule would see it as an oscillation between three bull and bear markets.
Another liberty I took in selecting recoveries for the overlay was to include two rallies after declines of less than 30%. In both cases, they marked the beginning of a new economic era. One is the recovery that began in 1949 after the 23.95% post-war decline. The 12-year, 355% advance that followed warranted inclusion. Likewise I added in the first 500 days of the 250% rally that started in 1982 after a 24.13% decline. The 1982 recovery brought an end to the decade of stagflation and launched the great Boomer bull market. Here's a larger view of the overlay.
The Current Recovery
The Dow is currently 56.3% above the March 2009 low after reaching an interim closing high up 71.1% on April 26th. Compared to the other 15 rallies at the equivalent point, the current rally is in 8th place. The volatile recovery after the Crash of 1929 leads the pack by a wide margin. The second, fourth, fifth and sixth place rallies date from yet earlier periods.
Where do we go from here? Some of the historic 500-day rallies went on to substantially higher gains — the launch of the Roaring Twenties, the Boomer Era that started in 1982 and resumed after the Black Monday misadventure in 1987. Even the recovery from the Crash of 1929 falls into this category, although the Great Depression would eventually lead to some significant retracements.
On the other hand, several of the earliest rallies (1903, 1907, 1914) would soon falter, a fate that later befell the rallies in 1962, 1970 and 1974. If we look at the Dow chart adjusted for inflation, the failure of these recoveries is more obvious. The chart below is adjusted for inflation using the technique popularized by Robert Shiller, namely adjusting with a spliced index based on the Consumer Price Index for Urban Consumers (CPI-U), which dates from 1913, and the Warren and Pearson's price index for the pre-1913 inflation estimate. In my real version I've chained the daily prices to the May 1896 dollar value.
The Critical Uncertainty
The question remains unchanged from our previous review of this chart: Is the rally of the past 16.5 months the early stages of a secular bull market? Or will the future resemble something closer to the early 1900s, the late 1960s-1970s, or something in between?
For a broader perspective on the history of Dow rallies, see my real (inflation-adjusted) analysis.
Copyright (c) Doug Short
