You have to go back to 1973/4 to find the last time that the UK stock market fell in two consecutive years, but 2000/1 seems set to join the club. If 2002 were also to bring a down year, then we'd have to go back to 1947-9 to find the last time the market fell three years in a row.
The reason that these prolonged bear markets are so unusual may be that the outlook for shares normally changes rapidly. So, things are ticking along nicely and then...Wham! Suddenly everyone realises that actually things aren't that rosy after all. So the market falls far and fast, leaving it set to move gradually forward again next year (as it tends to over the long term). This time, things have been a little different, with the downturn in economies around the world, most particularly America, creeping up on us relatively slowly. This time last year investors were looking for an improvement in 2001, but it just hasn't happened.
Really, though, there's no such thing as bull or bear markets, except with the benefit of hindsight. Markets don't trend anywhere. They just assimilate information. We have no way of knowing at any point in time whether things will turn out better or worse than expected. That's the way it is with expectations. As a result, when we sit at the end of one year and think about what to expect from the next, the market's recent direction is no help to us at all.
Looking at the CSFB Equity-Gilt Study, and extending it to include down years in 2000 and 2001, there have been a total of 32 down years out of 132 years since 1869. From that observation, we can guess that the probability of a down year occurring in any one year is a touch less than 25%.
On that basis, we'd expect to find that a quarter, or 8, of these 32 down years have been followed by another down year, giving us a 'double'. In fact, there have been 12 doubles since 1869, but that's well within the bounds of statistical aberration.
We'd also expect to find that a quarter, or 2, of the expected 8 doubles are themselves followed by a down year, producing a 'treble'. There have indeed been two of these.
For 'quadruples', we'd expect to see a half of an occurrence. So we could say that there's a fifty:fifty chance of there having been one since 1869. As it happens, we haven't had one.
So, the market may recover a bit in 2002, but then again it might not. I'd say the odds of having an up year were around 75% and I'd also say that its got nothing whatever to do with what has happened in 2000 and 2001.
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