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Sharemarket volatility & how markets rebound from lows
Vanguard Investments have put together a really useful chart plotting the volatility of the Australian share index since June 1978. On the chart they have highlighted 7 significant share market falls of more than 10% over that period. The chart also tracks the length of the decline and the corresponding time taken to recover from the decline. - Click here to be taken to the chart - Australian Share Market Volatility.
The average fall has been 21.2% with the average decline of 8.6 months. The more positive part of the chart shows that the average recovery period has been 15.3 months. Another statistic that is not included on the chart but has been widely reported is the average rebound from market lows over 12 months which has been 34% in Australia. See Vanguard's Robin Bowerman's blog for further commentary - Looking Back.
So where is the current Australian market?
The most recent low was reached on the 5th of August with the ASX200 falling to 4,758.5. The high can be tracked back to the 1st of November when the ASX200 reached 6,851.5. This is a fall of 30.55% over a period of just over 9 months. Comparing this to the past 30 years, this decline is one of the more severe (or has been one of the more severe for those who's glass is half full) - 3rd worst out of the last 8.
What insights can we learn from this data?
If you do not believe in market timing, then this data clearly shows the risk of pulling out of the market after the market has had a significant decline. Especially now after the market has already fallen over 30%. It could go further. The largest decline has been 43.5%. But the possible 12 month rebound, based on averages, would outstrip this further fall.
For those with a very long investment timeframe, the graph shows that the share market has always rebound and kept rising over time and overcome the market declines that are inevitable.
Of course, it could all be different this time.
The average fall has been 21.2% with the average decline of 8.6 months. The more positive part of the chart shows that the average recovery period has been 15.3 months. Another statistic that is not included on the chart but has been widely reported is the average rebound from market lows over 12 months which has been 34% in Australia. See Vanguard's Robin Bowerman's blog for further commentary - Looking Back.
So where is the current Australian market?
The most recent low was reached on the 5th of August with the ASX200 falling to 4,758.5. The high can be tracked back to the 1st of November when the ASX200 reached 6,851.5. This is a fall of 30.55% over a period of just over 9 months. Comparing this to the past 30 years, this decline is one of the more severe (or has been one of the more severe for those who's glass is half full) - 3rd worst out of the last 8.
What insights can we learn from this data?
If you do not believe in market timing, then this data clearly shows the risk of pulling out of the market after the market has had a significant decline. Especially now after the market has already fallen over 30%. It could go further. The largest decline has been 43.5%. But the possible 12 month rebound, based on averages, would outstrip this further fall.
For those with a very long investment timeframe, the graph shows that the share market has always rebound and kept rising over time and overcome the market declines that are inevitable.
Of course, it could all be different this time.
Tags: Sharemarket, market, timing, volatility
Views: 0
Replies to This Discussion
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Permalink Reply by Kbot on -
Interesting data and fantastic post Scott. Love your work.
It's true that some people try to pick the market and only end up selling low and buying high. A long term investment horizon is best for most people, and looking at share prices on a daily basis is no good unless you're a trader. Will just turn you grey early and make you make bad investment decisions. If we revalued your house every day most of us we would have a heart attack and sell in a panic.
You ask where the Aust market is...that's anyone's guess. Although histroy tells us that the market will head up again, it's impossible to pick the bottom and to know when we're going to head north again. Doesn't mean I won't have a crack at predicting it. ;)
Personally, I reckon the market has some way to fall. The fallout from the credit crisis is far from over and will have far-ranging impacts on the market and our behaviour. Australia has been booming for a long time, and it's inevitable that we hit a roadbump at some stage. Another recession we had to have... I think it'll be another year of moving lower and sideways before confidence comes back not only into our market, but more importantly the market that has such an impact on the direction of ours - the US market.
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Permalink Reply by Miffy on -
Wow, Scott, I'm impressed with your research and comments. Nice work!
I think the key is that no matter how bad things look, history shows us that things will come back at some stage. It's just a matter of when. This is the prob with people trying to time the market.
That said I tend to agree with Kbot to a certain extent - I can't help but put my spin on things! :0
I think that the subprime crisis has some time to go and there's more pain for us here in Australia for another 12-18 months. Time will tell.
Miffy
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Permalink Reply by Bandwidth on -
Hello Scott
Great chart and article.
Your highlighting of the highs and the lows, their severity and the timing is interesting. Pointing out the risk of pulling out when the market has corrected to the current point is very pertinent.
I am a little uncomfortable with averages as they can sometimes mask the real information.
Another point of interest is that on the 1st of November the XAO was accelerating at a rate last seen just before the 87 crash. The market modeling system I am using suggested I exit the marketplace, I fortunately obeyed the signal.
Not all tops and bottoms can be measured but sometimes the current model mimics the past too closely to be ignored.
In my view, current conditions are starting to look very like post 87 crash.
Analysing data over the past 20 years shows that the XAO has a high probability of being down in late june through Aug and up in late Aug through Dec.
As you have said it could be all different this time.
Only time will tell
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