I had been waiting for some news to update my column on this site. Last month I said it was too hard to call the market without more clarity on the RSPT (resource tax). Well, we got that yesterday morning in spades. Kevin was shown the red card and Julia scored in injury time only hours after the Australia footballers played their hearts out to beat Serbia 2-1.
So it’s Vale Kevin (the irony of vale being both the Latin for farewell and the name of one of the biggest miners in the world) – or is it? It worries me that he made a very long list of “I am proud of this”, “I am proud of that” statements and then promised to contest the next election and serve the party in any way he is asked.
On the other hand, the new PM, Julia Gillard, clearly stated she would negotiate and not consult with the miners and stop the media campaign today. To me, this means there will be a tax but a well thought out one that the miners can live with. While not business as usual – as in pre-RSPT days – it does seem to me only a sliver will come off my forecasts made before the RSPT was released. I watch with baited breath for analysts’ revisions to dividend and earnings forecasts over the next week or two.
But even without the RSPT, some investors seem to be losing heart. As it happened yesterday, I dusted off some charts I made at the beginning of April 2009. At that time, we were all wondering how big the fall in the market could be. Some of us thought we might have just turned the corner – some thought the March 2009 rally was just a brief respite. I constructed a comparison of the then current bear market with the only other (12) bear markets I could find in our market (going back to the 1800s) using monthly averages on the All Ordinaries price index. I found that six of the bear markets seemed to have something in common. I reconstruct that analysis in Table 1 here.
My argument was simple. The speed of the descents of the bear markets starting in the months shown in Table 1 were similar and – except for the very shallow 1941 bear market – there was some similarity in the time taken to reach the bottom – about 16 months on average and 17 months for the 2007 market. The question I posed to myself was how quickly the market could recover. I am a believer in that if some event has happened a few times, it is a more likely option for the future than if something has never happened before. But more likely doesn’t mean it is likely! Past performance is not a reliable indicator of future performance but sometimes it is all we have got.
The other five markets recovered to a half way point (meaning 50 per cent back to the top from the bottom as in a Fibonacci retracement) in an average of 14 months – that would mean May 2010 if this market was similar. It didn’t quite happen but we got pretty close! It happened on a daily basis but not for the monthly averages.
The average complete recovery for the other five markets was 35 months at an annual rate of 24 per cent excluding dividends. Nice, if you can get it. That would mean back to 6800 for the S&P/ASX 200 in February 2012. So where are we up to?
It turns out that – at least visually – we are on track to compete with two of the markets – the aftermaths of the 1929 and 1973 recessions. I have lined the data up in Chart 1 so that the January of 1929, 1973 and 2007 are at the left of the chart with the axis measuring months from the January. The peaks did not all occur in the same month. The 1973 market did peak in January 1973 but 1929 had two similar peaks in February and July/August 1929. You can line them up how you see fit.
I am surprised by the similarity of the recoveries – even if we line the peaks up rather than the Januarys. Despite all of the ups and downs over the last six to nine months, we have not lost significant ground. At around this point in the 1973 bear market recovery, there was a really big correction. It was smoother sailing following 1929 although they had a very large false start. So if history were to repeat itself, where would we be? We could be at just under 8000 for the S&P/ASX 200 by the end of 2013. That recovery equates to growth of around 16 per cent per annum over the next three and a half years not including dividends.
Of course, this visual comparison proves nothing. But I suspect at this point, in the aftermaths of 1929 and 1973, there were many sceptics who were subsequently proven wrong. This analysis gives me some comfort in sticking to my optimistic forecasts. After analysts have probably adjusted their forecasts for recent events (up and down), I’ll return in a couple of weeks with hard numbers. For now, let’s just have a rest after a very volatile couple of months and maybe experience a gentle upturn in the market.
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