Perspectives on Waterfall Declines
By: Jeffrey A. Hirsch & Christopher Mistal
March 10, 2020
Volatile market action over the several weeks warrants some much needed perspective into the history of these types of waterfall declines. Fortunately, we have this research on hand and have been examining the nature of deep, fast selloffs like we have experience here in early 2020 as well as the nature of the inevitable and often sharp recoveries.
First of all yes, this time is different – and yet it’s not. The headline causes of each of these historic waterfall declines are all different and yet investor, trader and money manager behavior remains rather similar. Fear has once again exposed the market’s overvaluation and weaknesses. This time it’s the fear of the coronavirus pandemic and price war in the oil market that spills over into the rest of the financial. 
Like the previous occurrences of waterfall declines in the table and graphs below the market reacted to fear and sold off fast and hard. It’s too early to tell if this waterfall decline is over or how fast and far the recovery will be. As we continue to analyze the current situation a thorough review of the history of waterfall declines and their subsequent recoveries should provide some much needed perspective.
Most bear market bottoms since 1950 were preceded by precipitous declines. These plunges, or waterfall declines, ranging from 12-28% and 2-4 months in duration, were responsible for creating the feelings of outright fear, desperation and helplessness that so characterize investor sentiment at bear market bottoms. Remarkable however, is the fact that it only took 3-8 months for the rebound from those bottoms to reach the levels where the final declines began.
This phenomenon was first documented in December 1974 by our illustrious founder and resident sage, Yale Hirsch. In the January 1975 issue of this newsletter’s predecessor dated December 11, 1974, this discovery enabled Yale to accurately forecast a 38.5% rise in the Dow from December 1974 closing low of 577.60 to 800. The headline read “Dow 800 By April 1975” – one of Yale’s many bold, prescient and amazingly accurate forecasts. 
Also astounding is how this pattern has recurred at practically every bear market bottom since. For this current study we have gone back a little further than Yale’s original work and examined every bear market since 1950. Two bear bottoms did not qualify as they did not meet our waterfall decline criteria and two were slightly off. The waterfall declines in August 2015 and December 2018 were not bear market bottoms. The rest fit the bill to a tee. 
[DJIA Waterfall Declines since 1950 Table]
Exceptions to the Rule
The final drop to the 1982 bottom was not as severe as the others and ended the 16-year secular bear market that had ruled the market since 1966. Unemployment peaked at its post-WWII high of 10.8% and the snapback rally reclaimed the level of the final decline in eight days. The 1987 Crash, caused by a technical glitch at the New York Stock Exchange, created a 34.2% freefall in 17 days which took nearly 2 years to reclaim.
1957’s nascent decline may have been exacerbated by the passage of the Civil Rights Act of 1957 and the related racial standoff in Arkansas. The rebound here took ten months, somewhat longer than the others. AT&T’s breakup in January 1984 likely awoke the bear. The sideways action from February to the July 1984 bottom made this waterfall decline and rebound the exception. As mentioned above August 2015 and December 2018 were not bear market bottoms. All of the remaining 15 bear-market-bottom final waterfall declines were triggered by an exogenous event or major financial/economic calamity. 
Cuba, USSR, Vietnam & Watergate
Cold war machinations spooked the market in 1960 when the USSR shot down a U.S. U-2 spy plane in Soviet territory in May and Castro seized U.S. oil refineries in June-July, which led to Cuban embargo, which largely remains in effect over 60 years later. JFK’s 1962 crack down on the steel industry in April sent Wall Street reeling. When the U.S. escalated military action in the Vietnam theater in 1966 by firing into Cambodia, bombing Hanoi and pumping up troop levels near half a million, the market blew up as well.
More trouble in Vietnam and swelling protests here in the States, culminating in the Kent State and Jackson State shootings, forced a bottom in May 1970. Nixon’s halt on the convertibility of gold and the implementation of wage and price controls tipped the scales in 1971 and helped push the market lower. Nixon’s resignation on August 9, 1974 set off the final plunge of the 1973-74 bear. An increase in Social Security taxes and minimum wage hike in late 1977 helped facilitate the last gasp of the 1976-78 bear.
With inflation sky-high in January 1980, President Carter imposed economic sanctions on the USSR in retaliation for the Soviet invasion of Afghanistan. The February 1980 attempt by the Hunt brothers to corner the silver market sent the stock market over the edge and then President Carter forced the U.S. boycott of the Moscow Summer Olympics in April. 
Iraq, Long Term Capital, 9/11, Subprime Crisis & Debt Ceiling Debacle
With the junk bond debacle, the S&L crisis and the breakup of the Soviet Union in full swing, Iraq’s August 1990 invasion of Kuwait knocked the market into a tailspin. Over the backdrop of the Clinton-Lewinsky affair and President Clinton’s impeachment, a global financial crisis in the summer of 1998 forced the Russian ruble to collapse and noted hedge fund Long Term Capital to fail; creating the shortest bear market on record. 
With the market on shaky ground in the summer of 2001, the terrorist attacks on September 11 closed the market for four days. When it reopened the following Monday, the Dow suffered its worst weekly loss since 1940. In 2002 corporate malfeasance, trouble in Afghanistan and Iraq War drums had stocks on the ropes. WorldCom failed in July and President Bush addressed the U.N. on the “grave and gathering danger” in Iraq in September.
In 2008 the subprime mortgage fiasco had completely morphed into a global financial crisis, the likes of which we have not experienced for decades and fear of depression loomed. Lehman was allowed to go belly up on September 15 after the government took over Fannie Mae and Freddie Mac and orchestrated the rescue of several large financial institutions and subsequent bailout of others. 
Finally, on October 1, the U.S. Senate passed the $700 billion bailout bill. The Dow proceeded to plunge, falling for the first eight trading days of October in a row, suffering its worst weekly loss ever. DJIA initially hit bottom on November 20 at 7552.29 and rallied to close out 2008 but suffered a second waterfall decline before finally reaching bottom on March 9, 2009 at 6547.05.
In 2011 the European Union was mired in a sovereign debt crisis while here in the states, Congress was deadlocked and initially unable to come to terms over raising the U.S. debt limit. The U.S. lost its AAA credit rating, consumer and investor confidence fell and DJIA dropped 16.3% in 2.5 months from July to October.
Waterfall Declines 1950-2014
Waterfall decline 2015-2016
Waterfall Decline 2018-2020

History Is Our Only Guide
It is still too early to tell if the bottom is in yet. But from all the analysis we have done it appears that the bulk of the damage has been done. Yes we all remain concerned about this virus, yet health and government officials have become increasingly vigilant and the numbers are improving. 
Our “Best Six Months” strategy has a 70-year track record and has worked over many timeframes and through crises, exogenous events and all types of markets. Our other seasonal and cyclical trading and investing strategies have also stood the test of time. So stick to the system, heed stop losses and remain rational.