Why global sharemarkets still have further to fall: Kohler

The fall of both the S&P500 and the Dow Jones this morning to below both their November 2008 and July 2002 lows is an event of huge significance.

It means the bottoming process that seems to have been underway since 10 October last year – exactly one year since the S&P500’s peak in 2007 – has been broken, and more symbolically important, perhaps, it means this bear market is equivalent at this point to the 1929-1932 event.
After 17 months the bear markets that began in 2007 and 1929 are both worth minus 53%.

In 1929 the Dow Jones Average went on to fall 89.2% after 34 months. Where this bear market is heading is anybody’s guess of course, but there is no reason for thinking the bottom has been reached yet.

Then again, the US sharemarket has fallen for six sessions in a row and there is a feeling that all hope is lost – that the banks are bust, that the auto industry is kaput and that the Obama Administration won’t be able prevent more home foreclosures driving house prices down further.

That is normally the recipe for a rally. At this point in the 1929-32 bear market, the Dow was half way through a powerful rally that lasted three months.

This time the rally has already happened. The S&P500 went up 23% between 21 November and 9 January, but ran out of steam as the shocking economic data for the fourth quarter of 2008 started coming in.

Then the fact that Citigroup and Bank of America are effectively bankrupt and need to be nationalised shocked the market and worsened the retreat. The equity of those banks has now been all but wiped out, which has affected the stock prices of all banks.

The disturbing element of this morning’s capitulation on Wall Street is that it went well beyond financials – in fact the banks rallied a bit.

Analysts are redoing their earnings numbers for all industrials and resources firms in the light of the economic calamity occurring in Europe and Japan; investors are finding that while they might have thought the recession’s affect on profits was in the market already, it turns out that it’s not.
In 1931, after the Dow broke below the 1930 lows, it was virtually non-stop to the bottom, apart from minor upward jerks every six months.

But history never exactly repeats itself.



This article first appeared on Business Spectator



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