MARKET COMMENT
Four Years Of FTSE Falls

By Stuart Watson (TMFTiger)
December 12, 2002

You probably don't need me to tell you that, barring one of the most spectacular rallies ever seen, the UK market is set to record three consecutive years of losses. There's no denying it's been a painful time for the vast majority of investors.

A 6% fall in 2000 was followed by 13% fall in 2001. At the moment we're looking at a further fall of around 22% for 2002. These figures include dividends so the raw share prices have actually fallen a little bit more. Since 1869 there have only been two other occasions when the market fell for three years on the trot, namely 1929-31 and 1947-49. For most of us that means we are already in uncharted territory.

So what are the odds of a rather unpleasant four of a kind? There has never been a period since 1869 when we've had four straight years of losses, although the period from 1937-40 was a very near miss. In the periods that followed the previous examples of three down years the market actually did pretty well. Fans of the 'reversion to the mean' theory of investing won't be surprised to hear that. Five years of 10%+ gains were recorded from 1932 to 1936 and the market more than doubled from 1950 to 1954.  

Common sense would suggest that after each down year the odds on the market falling the year after become slimmer. You have to hit the bottom at some point. But then common sense has little to do with the short-term direction of share prices. There's pretty good evidence to back up the theory that short-term movements are random. Given that, you'd expect the odds of a further fall in 2003 to be around 25%, being the same odds of a selecting a down year if you were to pick any year at random from 1869 to 2001.

Well, do you feel lucky....Fool?