With the market dropping big in the first two months of the year and then rallying big over the last two months, investors are wondering where we go from here. We have a cool file here at Bespoke that looks at the market’s pattern in the current year and finds prior years with the most similar patterns. The file looks at the correlation between the year-to-date returns of the Dow at any point in the current year with all historical years.
Since 1900, there have been two years that have a correlation with this year (as of May 5th) of more than 0.75 (1 is perfectly correlated). These two years are 1982 and 2000. As shown in the chart below, the chart patterns through May 5th have been very similar for all three years, although the moves this year have been more extreme. The current year is most correlated with 1982 at this point, and as shown below, the Dow actually topped out in May of that year and went on to make a new low, only to post huge gains in the last quarter of the year to finish up 20%. If the rest of 2009 plays out anything like 1982, it will be painful at first but sweet in the end. In 2000, we had a similar decline through early March, saw a big rally into the Spring, and then traded sideways for the rest of the year to finish down 6%.