Based on new empirical research findings, the Dow Jones 30 (Dow) composite index is likely to soon peak. It will then begin a steady decline to new lows in 2020 or 2021.
According to the SCPA (Statistical Crash Probability Analyses) algorithm, the probability is 90% for the Dow to reach new lows before the current US recession ends. The algorithm’s forecast assumes that the 2020 recession will last until at least March of 2021.
The forecast, based on SCPA research of the Dow’s performance during the five US recessions from 1929 to 2007. Each recession lasted a minimum of one year. The chart below depicts the five recessions.
The research findings revealed that the Dow:
initially declined after each of the five recessions began
rallied to interim highs within five to seven months after the recessions had begun
fell to new recession lows after reaching the temporary highs
The five charts below break out the performance of the Dow for each of the recessions.
The chart below for the Dow Jones depicts that the index closed at its post-crash high on September 2, 2020.
Based on SCPA, the probability is 100% for the Dow to have already reached its post-crash high, or by September 2020. Such will be the seventh month since the recession began. Coincidentally, the SCPA has forecasted the post-crash high to occur for a dozen other countries by September 18, 2020, as well.
The Dow’s big question for the recession of 2020 is will it last a minimum of one year? If the answer is yes, the SCPA’s probability is 90% for the Dow to pierce its March 23, 2020 low before the 2020 recession ends. The calculation of the 90% probability came from computing the average of the following:
As of the March 23 low, the Dow had declined by 36.5%. For four of the prior five (80%) recessions, the minimum decline ranged from 41% to 89% before the economic downturn concluded.
The Dow for all five (100%) of the prior recessions reached its recession low after the seventh month of the recession.
From the findings published on August 27, 2020, in “Probability of V-Shape Recovery Low, Depression High,” the probability is 99% for the current recession to last at least one year. The findings were comprised of Deloitte’s forecasts for the US economy from 2020 through 2025. The empirical data for the US economy dates back to 1929.
With the probability almost 100% for the Dow Jones composite index to reach a new low in 2020 or 2021, and before the recession ends, investors need to be defensive.