I do not compare this current equity correction to 2008 because I believe we have vastly different circumstances. 2008 was the implosion of the financial system with the distress of many financial institutions caused by incredible leverage, bad lending practices and a historically massive decline in housing prices. Now we have more optimistic signals: GDP has turned mildly positive, large corporations are in very lean shape, the earnings yield on the S&P 500 is in the 7-8% neighborhood, residential real-estate is bottoming, inflation is tame with a primed pump via low short-term rates, the yield curve is very steep, and the jobs outlook seems to be getting better.
On the negative side: commercial real estate is probably where sub-prime was in 2006, banks are still strained, there is going to be high single digit unemployment for the foreseeable future, Europe is imploding without any strong political leadership, financial regulation is targeting the profitability of banks via limits on derivatives trading, developed nations are facing massive budget deficits, and there are signs of overheating in China and other emerging markets.
With this landscape of pros and cons we can expect a lot of volatility. I do not expect us to have the next great bull market in equities, but I also do not believe that we are headed towards the lows of 2009. As a betting man, I suggest that this decline will bottom out in the 975-1,000 range on the S&P 500 if it has not bottomed already. That would put the correction on the historically larger side of about 20%, but would seem reasonable considering valuations and the pervasive fear in the markets. Most of us have short memories and will be convinced that what happened in 2008 will repeat itself now, but if you look at historical corrections, this is far from being out of the ordinary.
1946: 10.2 percent decline over 24 calendar days; recovery 12.3 percent over 42 days.
1950: 14 percent decline over 35 days; recovery 16.5 percent over 67 days.
1953: 14.8 percent decline over 252 days; recovery 17.5 percent over 178 days.
1955: 10.6 percent decline over 18 days; recovery 13.8 percent over 34 days.
1959-60: 13.9 percent decline over 449 days; recovery 17.1 percent over 94 days.
1967-68: 10.1 percent decline over 162 days; recovery 11.7 percent over 55 days.
1971: 13.9 percent decline over 209 days; recovery 16.3 percent over 73 days.
1974: 13.5 percent decline over 25 days; recovery 15.9 percent over 52 days.
1975: 14.1 percent decline over 63 days; recovery 17.3 percent over 118 days.
1976-78: 19.4 percent decline over 531 days; recovery 24.6 percent over 527 days.
1979: 10.2 percent decline over 33 days; recovery 12.2 percent over 75 days.
1980: 17.1 percent decline over 43 days; recovery 22.2 percent over 109 days.
1983-84: 14.4 percent decline over 288 days; recovery 18.5 percent over 181 days.
1997: 10.8 percent decline over 20 days; recovery 12.2 percent over 39 days.
1998: 19.3 percent decline over 43 days; recovery 24.1 percent over 84 days.
1999: 12.1 percent decline over 91 days; recovery 13.8 percent over 32 days.
2002-3: 14.7 percent decline over 104 days; recovery 18 percent over 62 days.
2010: 11.8 percent over 31 calendar days since April 23 (14.7% intra-day).
– Source: Standard & Poor’s
