Thursday, March 14, 2013

Playing Catch-Up

Chart of the Day

Today's chart comes courtesy of the "Chart of the Day" site that I recently found.

Here's an excerpt from the commentary that accompanied the chart (I added the emphasis):

Today's chart illustrates rallies that followed massive bear markets. For today's chart, a 'massive' bear market is defined as a decline of greater than 50%. Since the Dow's inception in 1896, there have been only three bear markets whereby the Dow declined more than 50% (early 1930s, late 1930s until early 1940s, and during the recent financial crisis). Today's chart also adds the rally that followed the dot-com bust during which the Nasdaq declined 78%. The current Dow rally has followed the post dot-com bust rally of the Nasdaq that began back in 2002 fairly closely and held to a general post-massive bear market rally pattern -- rally during the first 300 trading days, trade in a relatively flat choppy manner up until around 600 trading days and then re-embark on the second leg of the rally. History may not repeat, but it rhymes.

I don't know if we will necessarily follow the same pattern as prior markets but it does raise an interesting point.

While the market has clearly had a nice run in recent months, we also had a very severe bear market during the credit crisis.  After the S&P hit a high of around 1430 in May 2008, the S&P fell to 690 by early March 2009, or a decline of -52%. Today's S&P level of 1570 is less than +10% higher than where the market was five years ago.

During that period, the profitability of corporate America has continued to grow, and is now almost +50% higher than it was in the spring of 2008:

In other words, it seems reasonable to argue that perhaps the market is just now catching up with economic reality.