Despite the recent turmoil in markets around the world, stocks in the United States have generally gotten through the recent recession relatively well, having recovered substantially from the lows of 2009.
The recovery in US and global stock markets, however, looked in danger last week as stocks around the world fell amid persistent concern over European sovereign debt. The Standard & Poor’s 500 Index fell 4.2 percent to close the week at 1,087.69. The Dow Jones Industrial Average lost 4.0 percent to close the week at 10,193.39. The STOXX Europe 600 Index fell 4.6 percent to 237.11 last week, the lowest level in more than six months.
Most stock markets around the world are now showing losses for the year. The US stock market has proven to be no exception. The S&P 500 is down 2.5 percent since the beginning of the year while the Dow is down 2.3 percent.
The US stock market is clearly in the midst of a correction. Since the top in April, the S&P 500 is down 10.6 percent while the Dow is down 9.0 percent. Both indices hit their lows for the week on Thursday, at the close of which the S&P 500 was down 12.0 percent from its April peak while the Dow was down 10.1 percent.
Some analysts go further and think that the weakness in the past few weeks marks the start of a bear market. Others are calling it the resumption of the secular bear market that started in 2007. It is obviously too soon to say for sure though.
Despite the recent market nervousness, one possibly positive thing we can say is that, in the wake of the financial crisis that followed the bursting of the housing bubble, the US stock market has not followed the path that it took during the bear market starting in 1929 that was followed by the Great Depression. Back then, apart from one strong rally early in the cycle, the stock market was mostly in a pronounced downtrend for almost three years.
In contrast, in the bear market that started in October 2007, the stock market made a bottom in March 2009 and then rebounded strongly for over a year before its recent peak. Even after the recent decline, the Dow is 55.7 percent above its March 2009 bottom.
The stock market's positive deviation from the path taken during the Great Depression bear market shows that the deflationary pressure from the financial crisis has been successfully resisted for the time being, no doubt thanks to more forceful action by fiscal and monetary policy-makers this time around.
This could in turn mean there is a chance that we are back to the typical post-Second World War cycle with multi-year cyclical bull markets the norm.
If true, this also means that the correction thus far will be limited and will not turn into a full-fledged bear market.
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