(Hulton Archive /Getty Images)
After some gut-wrenching volatility in August, global markets have settled down in the past couple of weeks.
They have also rebounded nicely off the August lows.
As markets have calmed, the debate about whether we're in the early stages of a full-on crash has quieted.
But don't get too comfortable.
This is still an open question.
At times like these, it's helpful to get a historical perspective.
And what you find when you do that is that no one who is concerned about a crash should take comfort in the market's recent stabilization.
Why?
Because market crashes take time.
The market's recovery from the August lows might, in fact, be a "buying opportunity" that is the beginning of another surge to record highs.
But it also might be one of those bear-market rallies that have punctuated nearly every major market collapse in history.
The charts below, from portfolio manager John Hussman of the Hussman Funds,* illustrate this phenomenon.
The charts show how the last three major market crashes were preceded by initial drops of 10% to 15% followed by sharp rebounds like the one we're experiencing right now. These rallies seemed comforting and encouraging at the time. But then, just as many traders had decided it was safe to get back in the water, the real crash began.
First, 1987. In 1987, stocks peaked in August and then sold off sharply. Then they began a rally that, by early October, had recovered almost all of the losses. The top chart shows this rally, which was presumably quite comforting to traders at the time. The bottom chart shows what happened next.
(John Hussman, Hussman Funds)
2000. As I and many other veterans of the era remember well, the "Great Bubble" of the 1990s peaked in the spring of 2000 — and then stocks sold off sharply. This initial sell-off, however, was followed by a reassuring summer recovery. By fall, a full six months after the initial sell-off, we had regained almost all of the lost ground, and boatloads of smart people were congratulating themselves for "buying the dip" and "climbing the wall of worry."
Then came the disastrous 18 months that followed.
(John Hussman, Hussman Funds)
2007. As most of us remember, the years leading up to the global financial crisis were very good ones for the market. Stocks sold off sharply in July, but then recovered and surged to new highs. Then they sold off even more sharply in October. By March 2008, however, with everyone being assured that subprime-debt problems were "contained," stocks began to rally again. By June, they had made up most of the lost ground. Then they fell off a cliff.