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To better understand the behavior of the markets and analyst recommendations during periods of significant market corrections, we examined historic data around the last 3 major corrections (10/86- 12/88, 7/89 - 10/91, and 9/99 - 10/03) and compared the data to the current environment. In addition, we analyzed the historical index data for the Dow Jones Industrials (from 1929) and the SP500 (from 1950) looking for periods when the indices declined by 25% or more from previous highs. Afterward, we gathered each index’s performance and volatility at the index’s peak, trough and 3, 6, and 12 month periods from each trough.
The graphs below contain the Percent of Analyst Revisions Up and Down (vs. the prior 4 week values), and the equal weighted cumulative return of all of the stocks followed by the analysts during the respective periods. The 1987 and 1990 downturns were relatively brief, while the 2000 – 2002 downturn was stretched over a longer period of time as it took several years before the effects from the bursting of the large cap and tech stock bubbles, 9/11, and accounting scandals worked their way to the small cap and non tech universes.
After examining the three graphs, two simple conclusions stand out.
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