News / US Equities

A Glimpse of the Past By Fitz Aclan October 10, 2008

With the US stock market declining the way it has since the subprime crisis hit last year, I wanted to take a look back in time and compare the current decline from previous recessions since the 1900s. The reason why I did this was to see how the current market fares against previous market declines and determine whether the prices we are seeing now are already at par with historical levels.

As you can see from the table, I noted the major declines both on a Year-to-date or YTD (i.e. market decline for that year) and the Peak to Trough decline, which essentially measures the decline from the high of the previous year (Year High) to the low of the current year.

We want to measure the extent of the price decline within that particular year. The reason for this is that YTD in most cases does not capture the market decline or movement during the year. In short, its more reflective of the market move for the period.

As you will notice, the historical period most similar to the current crisis (aside from the Asian financial Crisis of which the US was not significantly affected) is the Panic of 1907. The story there was that Wall Street banks funded a failed attempt for a leverage buy out of a major Copper mining firm where the price did not go up and the stock operator essentially going belly up.

This led to a huge liquidity crisis at that time and resulted in several bank failures and banks throughout the United States during that time. It was only through the concerted effort of key bankers led by the great J.P. Morgan as well as several millionaires and key Wall Street people at that time such as John D. Rockefeller, Lord Rothschild and James Stillman, that liquidity was injected into the system through their efforts. They also went around the country to boost morale and restore investor confidence.

The panic triggered the formation of the US Fed in 1913 because there was no central bank in the US at that time to inject liquidity into a drying credit market.

Going back to the table, you will also notice that both performance metrics did capture the recession in 1980 , 1982 or even the 1987 crash or the 1991 crash (Saving and Loan Crisis) this is because the market recovered quickly (within several months) after the recession occurred and as such, did not result in a prolonged price decline.

From all these data you can see that the current market decline is fast approaching the historical levels with the exception of the 1930 Great Deppression where the market decline was severe. In fact, we are right at the same price decline as we saw in the 1970s and as such it is likely (from these illustration) that a significant rally maybe in place once the current concern has been addressed.