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October 11, 2008

Stock Market Decline in Perspective
by Prieur du Plessis

According to Bespoke, this week's stock market meltdown of 20.8% ranks second as the worst Monday-to-Friday movement for the Dow Jones Industrial Average since 1900. As shown in the table below, the only week that saw a bigger decline was the one ended on December 14, 1914. (Bespoke used an index reading a little before Friday's close - the final weekly decline was 18.2%.)

The market has dropped by 22.1% since the beginning of October and has not registered a single up-day during the first eight trading days of the month. "We've all heard of Black Monday when markets crashed in 1929 and 1987, but this is truly turning out to be Black October," said Bespoke.

The Dow recorded its record high of 14,164.53 on October 9, 2007. On Thursday, marking the one-year anniversary of the current bear market, the Dow closed at 8,579.19 - down by 39.4% or 5,585 points.

For some perspective on the magnitude of the current decline, Chart of the Day constructed a graph on how the Dow performed during the first year of all major declines since 1900. As illustrated, the first year of the current bear market has been more severe than the first year of any correction since 1900 - and that includes the correction that began in 1929.

The last word goes to longtimer Richard Russell (Dow Theory Letters): "This decline will end as all bear market declines end - in exhaustion. In bull markets we warn, 'No tree grows to the sky'. In bear markets we warn, 'No decline goes to zero, or at least none ever has'. Problem is that you can lose your shirt before a decline reaches zero."

Are we "there" yet? Nobody really knows what happens next, although some indicators are starting to signal that a bounce may not be all that far off. But stock markets are unlikely to find a cycle low before measures are implemented to stem the decline in confidence. It may take a while yet before we see the bear's corpse.

Sources: Bespoke, October 10, 2008 and Chart of the Day, October 10, 2008.

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Dr Prieur du Plessis
investmentpostcards.com

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

Copyright © 2008-2009 Dr Prieur du Plessis

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