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Will the market follow history?

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Published on: Friday, July 02, 2010

It appears history may repeat itself when it comes to the markets. To look at this downturn compared with previous ones, Ron Bewley from Woodhall Investment Research joins Peter Switzer on his Sky News Business Channel program – SWITZER.

With people concerned about Europe and other negative news out there, Bewley says he wanted to “get some positivity around here”.

“Not out-and-out optimism, but just positivity.”

Two weeks following the market bottom in March 2009, Bewley decided to look at what normally goes on with bear markets. So he looked at bear markets since 1875 of which there were 13. And six of them looked “dead ringers”, including the current downturn.

The other ones were in 1929 (Great Depression), 1941 (World War II), 1951 (Korean War), 1973 (mining) and the 1981 recession.

“If you overlay them, they all went down at roughly the same rate,” he says.

Back in March last year, the time he wondered whether this could be a sign that the market was at the bottom.

“I didn’t know we were at the bottom, but I hoped and I called it – I got away with that one,” he says.

The average number of months the market took to fall in the six bear markets was 16. On average they fell by 39 per cent. For the current downturn, it took 17 months and fell 50 per cent – “it looks a bit like the average”.

“I conjectured we could go up like the others, there’s something going on, there’s certainly no signs that it will happen, but this sort of thing has happened before.”

Bear markets compared

On Bewley’s next chart, he overlayed three bear markets – one from 1929 to 1935, the next from 1973 to 1979 and the current one from 2007 to now – and looked at them from January of the starting year.

“You can see beautiful bounce backs in the Great Depression and ’73, going way up to 120 per cent since the bottom,” he says.

The market fell sharply in the middle of 1973 to 1979.

“You would have panicked at that point, but it still went up,” he says.

With the current bear market, if it ends up in the same place as the other two on the chart, it would mean returns of 16 per cent per annum for three and a half years without dividends.

Bewley reiterates that the chart doesn’t show where the market is going.

“What we’re saying is if these things have happened before … you can't say it can’t happen because it doesn't happen,” he says. “So it allows you then to go and do your other work and say well, this is saying whatever.”

“The only six that fell sharply – the only six big bear markets all finished up the same way more or less. “

Check out Peter Switzer’s SWITZER on Sky News Business Channel, Monday to Thursday from 7pm.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. 

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