By John Authers

The financial upheaval has been good news for financial historians. Their discipline has not traditionally attracted much interest. Instead, investors went along with attempts to treat finance as a precise science.

But many metrics that seemed to work well for years are no longer helpful. And so the effort is on to dig into financial history.

Last week’s Long View laid out what I thought were the best four parallels in the past 100 years for the rally in stocks that started in March, which has now seen the S&P 500 gain 50 percent and many other stock markets do better.

These were the rallies of 1930, 1932, 1975 and 1982. The feedback to that column suggests that financial history is booming. Readers have been excavating financial panics and booms that had long left the collective consciousness. As the demand is there, let us take another dive into financial history.

One fascinating parallel, which I excluded because it missed my 100-year cut-off, is the rally that followed The Panic of 1907.

That incident had many points in common with the current credit crisis.

A financial paroxysm started as a run on the Wall Street banks, and was only averted by the determined actions of a group of big bankers to put money into the market. It led to the establishment of the Federal Reserve.

An excellent book on the incident by Robert Bruner and Sean Carr was published on its centenary, which came just as the credit crisis was starting.

This was a true “panic”. Once confidence in the banks was restored, recovery in the stock market was total.

From January 1906 until the worst of the panic in November 1907, the Dow Jones Industrial Average dropped 48.6 percent. Over the next two years, it gained 90 percent, almost regaining its high. That included a 61 percent rally in the first nine months.

This parallel is very helpful for the bulls. There certainly was a financial panic last year.

Beyond individual incidents, it also makes sense to aggregate crashes and bear markets through history.

Teun Draaisma, European equity strategist at Morgan Stanley, looked at 19 secular bear markets, including the US in the 1930s, Europe in the 1970s and gold in the 1980s.

started with decline

Each started with a decline from peak to trough of at least 40 percent that went on for at least a year.

The median fall was 57 percent in 21 months, somewhat worse than this one

The usual rebound is of 71 percent, and lasts for 17 months, implying that most of this rally has happened already, but with some more gain to come.

After that, 12 of the 18 equity market rallies that Draaisma looked at stalled within a few months of the first rate rise by the central bank. This implies that this rally can last a bit longer, as higher rates are unlikely for a year yet.

More than half of the recoveries Draaisma looked at gave way to protracted range trading.

John Hussman, of Hussman Funds, looked at the long-term fallout from three of the most famous bubble bursts - the Dow in 1929, gold in 1980 and the Japanese Nikkei 225 index in 1990.

As the chart shows, the extreme bubbles are followed by more than a decade of range trading. Big rallies like this one are common, and misleading.

Looking at speed, this rally looks worryingly fast. According to Mizuho Securities, the current rally has already come further in its first five months than any other post-war bull market managed in its first full year, but one.

The exception was the 1982 rally, the start of one of the greatest bull markets ever. Conditions then were almost the polar opposite of today’s, with high interest rates steadily falling, high inflation coming under control and the financial world steadily deregulating.

Finally, we need to look at markets’ intersection with the economy. Stock rallies tend to come shortly before the end of recessions.

An analysis by Capital Economics of London shows that virtually all the S&P’s gains at the end of a recession tend to come in the first six months.

It now looks likely that the recession, as in an outright fall in gross domestic product, probably ended in the second quarter of this year.

But there is no sign that consumers are buying once more, which argues against a strong recovery.

Where does this leave us? The bullish argument is that last year was a true Edwardian panic. As in 1907, the financial sector led the way into this crisis, making this different from most other bear markets.

But if this was anything other than a panic, then there is little reason to expect this rally to go on much longer.

If it does, that might even support those who argue that cheap money is inflating another bubble, just as it did in the middle of this decade after the deflating of the internet bubble.

The most likely scenario, however, is that the rally does not last much longer.