Wouldn't we all love the answer to that?
Exactly when will this financial madness settle down and everything can get back to normal?
To give you the answer to that, I think it's best we go back to project forward.
The past can be a great predictor of the future.
OK, let's get into it…
Consider that this crisis is the worst since the 1930's depression. The good news is that we're not going to go into a 30's style depression.
Back in the 30's, the whole banking and credit system collapsed. Thousands of banks around the globe went into liquidation. There was no safety net, no bail-out plan, no soft landings – it literally was an almighty collapse.
The economy came to a halt, people literally stopped spending, unemployment hit 25% (today it's 6%) and it took 12 long years to recover the losses.
Incidentally it was World War 2 that turned things around, when governments started to spend big again.
So the good news is, there wont be a depression.
Let's look at recoveries of recent years… Maybe this can give us a bit of an idea of when our markets will get back to normal.
Here are some stats from the All Ordinaries Index during and after a bear market.
Note that I've also included the percentage returns once the market bottomed… Very interesting.
APRIL 1981 – 15 month downturn, dropping 38%
** (Following 12 months after downturn, a 44% return)
SEPT 1987 – 5 month downturn, dropping 47%
** (Following 12 months after downturn, a 22% return)
SEPT 1989 – 16 month downturn, dropping 32%
** (Next 12 months, a 34% return)
FEB 1994 – 12 month bear market, dropping 18%
** (Next 12 months, a 21% return)
APRIL 1998 – 7 month downturn, dropping 11%
** (Next 12 months, an 11% return)
MARCH 2002 – 12 month downturn, dropping 20%
** (Next 12 months, 27% return)
Interesting stats aren't they?
If you were to average them out, you get an average downturn of 11 months and a 28% drop… and a rebound in the following 12 months of 27%.
OK, so what does this really tell us?
Here's what we know already… The downturn (now some will argue with this) started in November 2007. Our equity markets have lost 47% in 12 months.
Considering that this is the worst since the depression, I think it's fair to say that we're still in a bear market and unlikely to have begun a recovery.
The longest downturn prior to this was the '89 bear market which lasted 16 months. Add to that, the '87 crash which was a sharper percentage drop and a shorter downturn period of just 5 months, we're probably unlikely to see a full blown recovery for at least another 8-12 months.
What that means is if you invest now in equities, you could have your money sitting around doing nothing for at least 8-12 months minimum.
The good news though, is when the market does bottom and turn around, the next 12 months should be spectacular.
Whilst a lot of experts are calling this the buying opportunity of the century, I don't think you should be going in right now, I'd wait a little bit more and reassess the market opportunities around March 2009.
Sure, you can have a nibble at it and pick up the likes of BHP, QBE, WBC, WOW… but I'd only be spending about 20% of my available capital now and more importantly, my investment horizon would be at least 3-5 years.
Of course, if you're a trader and you don't care about buy and hold, then this market has been incredibly profitable. I know of several traders who are making thousands of dollars PER DAY using the volatility to their advantage in this climate.
So there you have it… Still a while to go yet for a major turn around.
This doesn't mean you should sit idle and wait, there are countless strategies that you can use right now to make serious money with the stock market.
I hope this helps.
Signed with Success,