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Wednesday, 12 February, 2003, 18:54 GMT
Market crashes through the ages
It is comforting how a little history can put everything into perspective.
If you think things looked bleak in the first half of 2002, spare a thought for 28 October 1929, when the Dow Jones Industrial Average plunged 12.8%. Or the day after, when it lost a further 11.7%.
Or indeed the great granddaddy of them all, 19 October 1987 - aka Black Monday - when the US market lost almost one-quarter of its value in a few hours.
And then there are the bear markets, where shares die the death of 1,000 cuts, suffering agonising losses stretched imperceptibly over months or even years.
Measured against the mightiest of these, the current share slump may not look impressive - but it is catching up fast.
Crashes and crunches
Broadly speaking, market crashes come in two main flavours.
The first - and less harmful - breed is the sudden onset of panic, an often violent reaction to an event or trend that feels nasty at the time but tends to be short-lived.
With the benefit of hindsight, these crashes are soothingly called "corrections".
The much more dangerous type is the prolonged depression.
Here, shares may rarely fall spectacularly, and may give occasional signs of rallying, but little by little their value is bled away over the years.
Flash in the pan
The epitome of the type-1 crash was 1987, the year when the 1980s boom started to turn sour.
After one of the most prolonged stock market booms in history, shares had become stuck in something of a summer rut, and whether out of boredom, or anxiety, or the curious herd instinct of trading psychology, the market turned sour in autumn.
Black Monday's collapse - by far the biggest one-day stock market fall in history - was ironically also arguably the least justified market crash ever.
On the next trading day, the Dow rose by more than 100 points - its biggest-ever one-day gain up to that time - and had recovered all its lost ground by just over a year later.
Boom and bust
Black Monday was the most dramatic in a huge list of horrible days on the market - many of which are now forgotten.
Among the nastiest was 27 October 1997, when a basically bullish market started to be rattled by mounting worries over emerging markets, especially debt-laden Asia.
In one day, the Dow lost 550 points, checked only by the circuit-breaker system put in place after 1987.
The market continued to be a little frisky thereafter - especially in light of the later collapse of the Russian economy and the multi-billion dollar failure of the LTCM hedge fund.
But nothing prevented the subsequent launching of the late-1990s hi-tech boom, arguably the most astonishing burst of irrational exuberance in history.
The 25-year slump
Far more troubling is the second type, of which the best-known example is the Wall Street Crash of 1929.
On the face of it, the crash had many of the flashy attributes of a 1987 or a 1997 - a period of exuberance followed by an alarmingly rapid tumble.
But the sting of the Wall Street Crash was in its tail, which extended into a bear market lasting almost throughout the 1930s and only ended by the stimulus of World War II military production.
From more than 300 points before the crash, the Dow only hit its lowest - at some 44 points - in 1934, and did not recover its pre-crash value until 20 years after that.
More to the point, in the meantime the financial misery created the most protracted global depression in history.
The important distinction here is between a simple crash and an all-out bear market, strictly defined as a prolonged decline in prices - in the case of the Dow, a 30% decline over 50 days.
In the 20th century, there were 30 defined bear markets on the Dow, and 25 in London.
While black days grab the headlines, bear markets can bleed an economy by stealth.
The Wall Street Crash aside, the century's two worst bear markets were arguably the 1972-74 slump after Opec's decision to hike oil prices, and the decade-long decline in Japanese share prices since the end of the 1980s.
In 1989, the Tokyo Nikkei share index reached almost 40,000 points. By the beginning of this century it stood at just 10,000, and has barely budged since.
The greatest bear market of this millennium was more localised - focusing on hi-tech stocks - but far more rapid.
The Nasdaq market of mainly tech shares, which peaked at just over 5,000 points in 2000, is now flirting with the 1,000 mark.
The tricky part is drawing any sort of conclusions from these crashes.
Any sort of statistical historical analysis is fraught with danger, given the market's proven reluctance to play by the rules.
But bulls can draw comfort from the fact that, of Britain's 25 bear markets in the past century, 21 have corrected themselves after a loss of some 35% - roughly where we are in July 2002.
Bears, meanwhile, can gloat over the fact that major crashes have occurred at roughly halving intervals - 89 years, 38 years, 18 years, 10 years - making this year time for another quake.
More broadly, though, history teaches that the old saw is correct - shares do offer the best returns in the long run.
The Dow, which has been trading since the end of the 19th century, has risen 130-fold since 1900, including a doubling in the past decade.
A dollar invested in General Electric - one of the founding members of the Dow - at the beginning of the 1890s would be worth a nominal $1,200 now.
It is just that the long run can be very long indeed, as investors in the 1930s, 1940s or 1950s will attest.
Way to go
So how does the 2002 crash measure up?
It is no record-breaker so far.
As of 15 July 2002, the FTSE 100 is 24% down from its mid-May peak, and some 43% off its all-time high of 6,930 points on the last trading day of 1999.
The more sedate Dow is only some 17% off in this latest flurry, and 26% down from its historical high.
Which, depending on your point of view, either means that things are not so bad, or that they have miles further to fall.
That is the trouble with financial history - it may be vaguely comforting, but it is of no practical use whatsoever.
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