Peaks and Troughs during Recessions

Last week, Calculated Risk had a great post taking a look at market corrections during recessions.


Calculated Risk graphed the change from the three year daily high and the monthly close. Here is his graph for the Dow going back to 1930. Here is his graph for the S&P 500 going back to 1951.


The downside is dramatic; however even more dramatic is the recovery after. Here are two graphs showing the changes from the three year daily highs and lows.
Here is a table showing the gains and losses from the tops and bottoms:




I am reminded of what a Japanese fund manager said after the massive two day declines at the beginning of last week (the Nikkei 225 went down 9.29% in those two days): "We will be buying back on value shares later today since we don't want to get slapped on both sides of the face...selling more than we should and failing to catch up when the market recaptures momentum."

The American Association of Individual Investors (AAII) publishes a sentiment survey measuring the percentage of individual investors who are bullish, bearish, and neutral on the stock market short term.

In September of 2000, the S&P 500 hit its high right during the internet stock bubble before the 2001 recession. The AAII sentiment survey was very bullish. In the beginning of September 2000, 62.5% were bullish, 29.2% were neutral and 8.3% were bearish.

In October of 2002, the S&P 500 hit its low after the 2001 recession. In October of 2002, the AAII sentiment survey was at the most bearish level in 11 years. 28.9% were bullish, 16.4% were neutral, and 54.8% were bearish.

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