The Comfort of Statistics

…what it could mean in 2013.

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I love math. One of the best courses I ever took in college was Probability and Statistics. I had a great professor who, as I recall, started the course out with predicting how many people in the class had the same birthday. He was right, naturally, and that was the start of the intrigue.

As we embark on the start of the new calendar year, many people make predictions about the markets. While we cannot make predictions with any certainty, we can study probabilities and use those outcomes to comfort us in times of emotion or uncertainty.

Since 1945, markets have endured ten bear markets. A bear market is a term used to describe a market downturn from peak to trough, in excess of 20%. Historically, every bear market has been followed by a bull market. A “bull market” is when there is a market increase in excess of 20% from trough to peak. Statisticians have measured the time it has taken for the market to push through the previous high.

According to Standard and Poor’s, the longest it has taken a market to return to its previous high, since 1945, is 5.8 years. This record bear market occurred during 1973-1974. You may recall the oil embargo of 1973-74, gas rationing, high interest rates, and the Watergate scandal occurred during this time. For comparison, the average amount of time it took for markets to reach their old peak, since 1945, was 2.2 years.

In July of 2013, if the S & P 500 index does not push through 1565.15, the peak on October 9, 2007, it will overtake the 1973-1974 bear milestone. While we can’t predict the future, we do know that every day, the probability increases in the likelihood of the market surpassing its previous high. Eventually markets, like most mathematical averages, will likely revert to the mean.

Historically, every bear market has been followed by a bull market. A “bull market” is when there is a market increase in excess of 20% from trough to peak.

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