Features

NEW YORK — The new, standard, all-purpose, no-risk stock market forecast is: “the market may not have reached its bottom yet – too many still feel bullish – and when it does, don’t expect a sharp recovery.” 

Such subjective advice was not sufficient for Gerald Perritt. Holder of a doctorate in mathematics, which he once taught, he compiled his own index, a misery index based in hard, factual, historical evidence. 

Perritt’s misery index assumes that one: the more the stock market falls, the worse people feel, and two: those feelings of dread are magnified by the length of time during which prices fall. 

And so, combining the percentage of stock market declines with their duration, he measured all 12 of them back to midyear 1946 – and then observed what happened thereafter. He reached two conclusions: 

1. The greater the index value, the greater the likelihood investors feel so miserable they dump their stocks; 2. the market’s greatest advances tend to occur shortly after the misery index becomes abnormally high. 

He terms his current misery index “abnormally high” at its current level, although there is no assurance is won’t go even higher. 

At this point, his latest reading tells him, he writes in “Gerald Perritt’s Mutual Fund Letter,” to “get ready for the onset of a significant rebound,” maybe even into new statistical highs. 

“The financial press would have you believe investors are not feeling enough pain for the bear market to end,” he writes, to which he responds, “baloney!” 

The 35.3 index tells him investors already have suffered greatly. It does not, however, tell him if they might suffer even more. And as the historical evidence suggests, that could happen before a rebound. 

He found that you have to go back to the stock market meltdown in late 1987 to get a misery index value greater than this. At that time the index rose to 36.8, based on a 33.5 percent decline over a 3.3-month period. 

As the record demonstrates, that decline was followed by a prolonged though oft interrupted, market advance. 

More than coincidentally, the most painful post-war decline, to an index of 69 at the bottom of the 1973-1974 bear market, was followed by a two-year advance in the S&P 500 that produced an 80 percent total return (including dividends). 

The message, Perritt suggests, is not to let misery blind you to the probability that the best of opportunities might be ahead when misery is prevalent. 

What’s missing from the index is a standard for telling when misery is at its worst.  

John Cunniff is a business analyst for The Associated Press