A “drawdown” is the change in the value of an index from a peak to a trough. Typically, the steeper the drawdown, the longer it takes to recover back to a previous peak. The drawdown in the S & P 500 index from October 2007 to March 2009 was about -56%, the worst since the Great Depression.
The all-time high on the S & P 500 index was 1565 in October of 2007. This is about the same level as the peak in March of 2000. As of this writing, the S & P 500 is around 1400. The S & P is currently up about +107% from the March 2009 bottom, and -10.5% from the all-time high.
A “bear market” is defined as a change of -20% or more from a previous peak. Sometimes these happen quickly, like 1987. In October 1987, the market fell over 20% in one day yet ended up positive for the year. Other bear markets happen more slowly, like 2000-2002, which was about 2.5 years from peak to trough.
Since the end of World War II, there have been 9 declines of 20% or more, with an average recovery time of about 3.5 years to return to the previous peak. The current recovery is approaching 5 years, so it is slower than usual. In looking at historical data, it is no surprise that it is taking longer since the magnitude of the decline was greater.
The economy continues to recover, just not as quickly as we would like. Similarly, jobs are being created, but at a slower rate than previous recoveries. Companies have high levels of cash on their balance sheets, and are increasing dividends. For the broad US market in the 12 months ending 6/30/12, there were more than 18 dividend increases to every decrease. Stock valuations appear reasonable relative to historical averages, especially considering the current low interest rate environment that is expected to persist for the next year or two. We believe these are significant positive factors that are currently being overlooked due to the media focus on the European debt crisis and the US election.
Bill Hansen, CFA
August 27, 2012