When the Dow Breaks: And Then, Quite Suddenly One Morning…

“For those intrepid Rip Van Winkles out there who manage to sleep through bear markets, which average about 15 months, snoring and snorting at their momentous yet momentary decline, the end of a bad story comes quickly.”

By Alan Steel

It’ll happen one of these days.

The economic bough will eventually break as some large, unforeseen rotting branch of the economy snaps, and the Dow Jones (and likely a host of other indexes of its ilk) will fall.

Headlines will call it the sum of all fears. Celebrity analysts will brush aside their years of failed predictions, and other such misdemeanors, by simply shaking their collective heads sagely to a chorus of “we were right all along’s” and “I told you so’s.” 

And it will be said that all the king’s horses and all the President’s men won’t be able to put our Humpty Dumpty markets back together again. 

There will be austerity measures, blame games, calls to arms and a Cluedo-like whodunnit investigation leading to a high profile failure or two, no arrests and a lot of mis-guessing about how Trump did it in the Games Room with a candlestick.  

Investors will flee their suddenly sliced and diced index tracker funds – buying high and selling low – for whatever product label reads “absolute guaranteed safety” while ignoring the fine print that reads “safety absolutely not guaranteed.”

And the bond salesmen of this planet will cheer just as they have at so many such financial market crossroads of yore, waving in the poor and huddled masses to sign long-term deals during an historically low interest rate environment where the upside is a break even or less.

But for those intrepid Rip Van Winkles out there who manage to sleep through this dour period of circa 15 months (the average length of a bear market), snoring and snorting at the market’s momentous yet momentary decline, the end of a bad story comes quickly.

In fact, since 1900 there have been about 125 corrections (call it one per year) and 32 grizzly bear markets, or one every 3.5 years – that’s according to Ned Davis Research.

You see, in the average correction, the market has historically fully recovered its value within 10 months.

And if you’re smarter than the average bear, you’ll know that from October 2007 to March 2009, after 54% got knocked off the Dow Jones Industrial Average, it has since recovered over three-fold.

Yep, some day, sooner or later, one of the financial market’s boughs will break again.

When that happens the sun will shine through to the ground levels of innovation below and let new things grow that were once held up from doing so by the canopy of tree branches above.

In fact, if it didn’t happen this way we might not have things like a social media sector, big data, robotics, healthcare innovations and all the things that have been helped along by the broken branches and learnings from events like the dot.com boom-and-bust, and property and credit bear market that followed.  

For those who do believe from experience that the past is a decent guide of future performance; since 1900 Ned Davis Research show that the average Bull period, once it’s shaken off those pesky Bears, lasts almost four times longer, with average Dow Jones Index total returns of 135%.

That’s compared to the typical average loss created by the grizzlies of 20%.

Anybody good at maths? 

So don’t fret the arrival of the next “quite suddenly one morning” surprise. 

Because it’s quite literally not worth it.

Alan Steel, Chairman, Alan Steel Asset Management

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