Before we can even consider this question one needs to have a heart-to-heart with themselves on one major issue…
Do you believe domestic equities are still in a secular bear market?
If you do, continue on. If not, there’s going to be little value in reading what follows.
If we make the simple assumption that domestic equites are still mired in a secular bear market (and I’m not here to argue the merits one way or the other), the 1973/1974 period is likely the closest parallel to 2012/2013.
The following table, courtesy of Crestmont Research, suggests why.
They have kindly pointed out that dating back to 1900, the market (DJIA) prior to 2011 had managed to register 10 instances of two consecutive annual gains within all secular bear markets. In all but one of those instances, the next year was down and -15% on average.
On only one occasion did the DJIA manage a third consecutive annual gain – 1972, coming off of gains in 1970-1971. We all know that ex the Great Depression, what followed was history’s worst bear market up until that point in time…the ~50% peak to trough decline in 1973/1974.
Which brings us to 2011, which, with the DJIA’s 6% gain, was only the second out of 11 instances historically where the Dow managed to eke out three consecutive annual gains within what was ostensibly an ongoing secular bear market.
Will the cadence continue and make 1973/1974 the closest parallels to 2012/2013 then?
I understand this is but one example – but you can’t help but identify with the simplicity of the logic in the argument.
In parting, what makes this comparison more fun is the fact that the DJIA peaked in early January of 1973 at its top before ending up -18% on the year (and -28% for 1974). With the DJIA still up ~200 bps YTD as this is typed (and SPX ~500 bps) both have a lot of ground to make up to the downside in a short period of time if this parallel is to play out for the remainder of the year.
In fact, if both indices end up -18% YTD when it’s all said and done, the DJIA would have to fall ~20% in 2H12 to close at ~10,000 and the SPX ~22% to close at ~1,030.