Markets Hit 12-Year Low - How Significant is this for Stocks?

Markets Hit 12-year Low for only the Third time, but will this be 1974 or 1932?

With US indices breeching their 12-year lows financial journalists and analysts have been reaching for their history books. A long term chart of the Dow reveals that only twice before has the index wiped out 12 years of gains; back in 1974 and 1932.

As everyone in the financial industry is praying that investors will return to the market the focus has been on calculating if these previous retracements can tell us anything about when we are likely to hit this bear market's low. In short, when will this pain end?

"What we found intriguing is that the 12-year lows were breached at a critical juncture in the bear markets," JPMorgan Chase equity analysts gush. In 1932 the April 8 finish came three months before the market hit its bottom, while 42 years later, the Dec. 6 breach marked the exact end of the 1974 low.

So there you have it! The equity pain will - or rather might - be all over within 3 months. Except that having just two data points does not fill me with the same overwhelming confidence as self-interested parties such as JPMorgan Chase. This strikes me as a slightly more sophisticated version of "when is it time to buy shares?" articles.

It is also worth stepping outside the purely US markets, this is after all a global marketplace. The most depressing index by far is surely the Japanese Nikkei. Peaking at around 39,000 in 1990 it now languishes around 7,500: that is a loss of over 80% over a period of almost 20 years and is currently sitting at a level seen in 1981. The "12-year low" is, at least for the Nikkei, a complete irrelevance.

However, stock market indices are all denominated in their local national currency so to accurately compare indices one has to do so using a fixed currency. In 1990 the US Dollar was worth about 140 Japanese Yen; in 2008 the average was about 100 Yen, a loss of about 30%. This is a good time to recall that percentages are multiplicative and not additive. An 80% drop in the index combined with a 30% rise in the currency does not equal an overall drop of 50%, but more like a 74% drop in dollar terms. Even with this adjustment the Nikkei looks in very bad shape.

The fear is that the American and European markets will follow the Japanese, in which case this 12-year low will be consigned to the dustbin of false indicators.