Learning From Prior Equity Market Patterns

Will the stock market repeat itself?

In the world of investments, historical data often help investment managers predict the future performance of the markets. My colleagues and I searched for periods with similar characteristics to today to help guide our investment decision-making during this period of almost inexplicably weak equity markets (although the high price of oil seems to have been taxing the markets recently). We found an eerily similar period with many significantly similar characteristics.

During the October 8, 1990, to October 8, 1992, and July 22, 2002, to July 22, 2004, periods we observed the following similarities:

1) First-term Republican presidents named Bush in an election year

  • 1992: George H. W. Bush
  • 2004: George W. Bush

2) Recently ended wars against Iraq

  • 1991: The Gulf War officially ended on March 3, 1991
  • 2003: Combat operations in the Iraq War officially ceased on May 1, 2003 [Author aside from 2020: “officially ceased,” but not ceased by any other practical measure.]

3) The S&P 500 index’s 50-day moving average breaks through the 200-day moving average on the upside

One of the classic technical signals of an impending uptrend is when the value of an index’s 50-day moving average rises above the value of its 200-day moving average. A moving average is the average market value for a given preceding period (often 50 or 200 days).

In 1991, this event happened about three weeks before the official end of the Gulf War.

In 2003, this event happened two weeks after the official end of the Iraq War.

4) Modest uptrend in between accelerated upward movements

In 1991, the S&P 500 traded around its 50-day moving average for nine months. In the prior month, the index rose approximately 20 percent, and rose about 10 percent in the two weeks following the more modest uptrend.

In 2003, the index traded near its 50-day moving average for six months. In the prior two and a half months, the index rose 25 percent, and rose about 10 percent in the two months following the more modest uptrend.

5) The index tests, and bounces off, its 200-day moving average

The value of the S&P 500 bounced off the value of its 200-day moving average—after the events described in item four—twice in 1992 and once in 2004.

6) The index falls below its 200-day moving average

After testing its 200-day moving average, the index fell below its 200-day moving average in both 1992 and 2004.

7) The index’s 50 and 200-day moving averages converge

One of the classic signals of an impending downtrend is when the 50-day moving average breaks through the 200-day moving average on the downside after a period of moving average convergence. In both 1992 and 2004, the 50 and 200-day moving averages started to converge in March (although they did not cross paths in 1992).


Of course, these similarities are interesting, but they mean little in and of themselves. One must also consider the performance of the index following the similar period. The index performed well for the remainder of 1992 and during 1993. In 1994, an unexpected rise in interest rates held the index in check for that year; however, the index subsequently experienced one of its best-performing periods from 1995 to March 24, 2000. In that period, the total return of the S&P 500 was 266 percent, which is an annualized total return of 28.1 percent—far above the long-term historical average of about 12 percent.

The phenomenal equity returns from 1995 to 2000 occurred during a period of less perceived risk than we experience today. The Cold War faded into distant memory, we quashed a rogue Iraqi dictator’s invasion of Kuwait and terrorism was considered an unsubstantial threat, despite the bombing of the World Trade Center in 1993. Today’s world, however, is perceived riskier, which could contribute to lower equity returns because equities perform poorly during periods of uncertainty.

With inflation restrained (so far), the economy growing at a respectable rate and interest rates still near all-time lows, and given the avoidance of a significant financial, geopolitical or geographic catastrophe, the historical evidence suggests that the equity markets will rise during the remainder of the year. At the end of this year, however, the outcome of the presidential election may have an impact on the performance of the markets.

Note: A version of this article appeared in the August 4, 2004, edition of The Daily Record, a law and business newspaper published in Rochester, New York.