2009: The Year After

Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).

This is his most recent commentary:


Taking a look throughout history at years following outsized declines

I don’t think I am alone in saying good riddance to 2008. A yearly decline of 38.49% for the S&P
makes it the 3rd worst year of all time, trailing behind the 47.07% bloodbath of 1931 and the 38.59%
decline in 1937. At the same time, simply looking at yearly declines doesn’t tell the entire story of a
market decline. Yes, 1931 was down 47.07%, an incredibly horrific decline on its own, but that year’s
decline was only part of a near 90% decline for stocks off the peak in 1929. Markets declined 17.37%
and 29.72% in 1973 and 1974 respectively, however neither number tells the true story of the 44%
decline that nearly chopped the S&P in half over those two years. And while 2008 will forever be
remembered for, among other things, being the 3rd worst yearly decline for the S&P, the bear market
peak-to-trough decline of 52% tells a much fuller story of the carnage and fear that pervaded for so
much of the year.

But we all know this already. What we don’t know is how 2009 will look and with so much
macroeconomic uncertainty hanging over the markets, a housing market that refuses to get better and
two more quarters of earnings contractions expected, the horizon is cloudy at best. But this isn’t
stopping strategists from around the street from making their annual predictions for the coming year.
In fact, Bloomberg has compiled the estimates from eleven of the largest brokerage houses which, on
average, expect a 17% rise in the S&P for 2009. UBS is looking for a 44% gain, JP Morgan is looking
for a 22% gain while only one, Barry Knapp from Barclays is looking for a decline of any amount,
3.2% in his case. Of course according to the article, none of these eleven strategists predicted any
decline for 2008 so there is some skepticism regarding their 2009 predictions.

I then asked myself a series of questions. Does this make sense? Only one expects a decline of any
amount in 2009? Does the market even go down two years in a row? It just did, earlier this decade,
but does it normally?

With that in mind, I took a look back at every single year for the S&P or its equivalent going back to
the 1920’s to see how markets reacted in the period following a year of any decline whatsoever as well
as outsized declines. Of course it should go without saying that past performance is not predictive of
future performance, however it is interesting to peruse historically similar instances to see what
occurred in similar situations.

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