Interesting chart from the Chartstore (tip of the hat to Ritholz) comparing the markets of 1907 to 2009. In 1907, the market faced a panic led by a bank run. This was the panic where JP Morgan (the man, not the bank) led the banks out of the crisis. He did so by letting the bad banks fail and putting his own personal capital in the good ones, which is what we should have done in 2008. This panic also motivated the banking community to ramp up efforts to convince (read bribe) politicians to create the Federal Reserve. This way, the banks would be able to have the taxpayer put up the capital during a bank crisis, rather than the bankers themselves.
If history repeats, we have some upside left of about 17%. Of course, the hangover would last to 2013 and take us down over 25% from here. Personally, I don’t expect this as the situation is different. The credit crisis is actually worse today as it is a worldwide crisis. Also, the total debt to GDP level was substantially lower back then, which means that consumers are carrying much higher debt levels today.
I still believe we will see more volatility in the markets between now and then. But, this chart is interesting. The key is to decide what risk you are willing to take. I fear many people are thinking of redeploying money into this market due to some recent good news. It is more important to develop a long term allocation. Once that allocation is determined, stick with it. You may add a sell signal to the allocation like a 200 Day Moving Average, but you shouldn’t be moving between asset classes based on the news. In fact, over the coming days, I am going to publish some articles on why I think the market is grossly overvalued even with the “good’ news.