Market Commentary - October 10, 2008

Markets have quickly entered into “bear market” territory by declining more than 30% from their highs. The last time stock markets witnessed a correction of this magnitude was in 1973, during which period the S&P 500 pulled back by more than 45%. Throughout history, bear markets have lasted on average, around 356 days (Source: Ned Davis Research 10/08/2008). So far, the current bear market, which is being identified as beginning on 10/09/2007, has lasted now exactly one year or 365 days. Given the severity of the current credit crisis and liquidity crunch, many expect that the recovery may still be months to come. For that reason, it may be helpful to capture some of the data on the longer bear markets in history and how they eventually recovered.

S&P Bear Markets with Corrections of more than 30%

                                                                                     Source: Ned Davis Research  10/10/2008

Given the irrational behavior of the market recently, it is clear that indices are trying to establish a bottom.  The key word for many investment strategists is “capitulation” or the act of surrendering by investors.  Capitulation is often identified by panic selling but also with high levels of trading volume.  Recently, we have witnessed the characteristics of panic selling but not with high levels of volume.  These days are often identified with intra-day reversals as well.  In other words, markets open down but eventually close up.  To many investment strategists, it appears that we are quickly approaching levels close to capitulation but have yet to arrive.  From these extreme lows, bear markets will also generally produce some level of a rally.  In fact, on average, bear market rallies have produced about a 13% return over about 50 days (Source: Ned Davis Research 10/10/2008). Looking at the periods above, these averages hold true with the best bear market rally having been produced from March through May of 2001 with a 20% return.  During crisis periods, markets can remain irrational for long periods of time, just as they have during euphoric bull market periods.  For this reason, it is difficult for anyone to predict how quickly the market bottoms.  Even more difficult perhaps, is answering the question, “How quickly does it recover?”  One clear positive to all of this is that as opposed to prior times, government intervention today is both focused and aggressive.  Global and coordinated interest rate cuts are occurring for the first time in history.  These efforts will continue on a global scale and ultimately should reduce the duration of both the market correction and the anticipated economic recession.

The views are those of Robert Garland, Vice President, Research Department, ING Advisors Network, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. Please consult your financial advisor for more information.

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