The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 32

The 2 Percent Rule

As a kid, my goal was to grow up to be a baseball catcher. My hero was Yogi Berra, a phenomenal catcher and a stunning philosopher—take the time he said, “Sometimes you can see a lot just by looking.” It was because of Yogi that I started counting the frequency of recurring events—just to see what happened and how often. If it was good enough for Yogi, why not me? One counting led to my 2 percent rule, which says major declines in the stock market occur at an average rate of about 2 percent per month.

This chart explains it. It shows an index of 12 industrial stocks during the legendary panic of 1907. Interestingly, this index mirrors the action of the Dow Jones Industrial Average (DJIA) almost exactly. That is, the DJIA peaked on January 19, 1907, at 103, as in this chart, and it bottomed out on November 22, 1907, at 53, as in this chart. For purposes of this lesson, you can ignore the lower chart with its 20 railroad stocks.

In the term “the Panic of 1907,” the year is when the bulk of the drop occurred, including the decline's ending “wash-out” crisis. But the “panic” is always long after the decline begins—very long. The 1907 panic had its seeds in early 1906. Since 1904, stock prices had doubled, but they peaked in mid-January 1906. From there prices declined, but by year-end they recovered—but not quite to their January highs. Throughout 1907, prices resumed their decline, washing out and forming a bottom in November, and then beginning a rally ...