Revisiting the Dow's Late 1930s Rally
By Eric Roseman
Probably one of the craziest suppositions now is to project a 100% gain for U.S. stocks over the next few years. After all, everyone, and I mean everyone is suffering big losses in the market this year and nobody truly believes equities will start a bull market any time soon.
But the lessons of the market from the Great Depression tell us that a 100% gain isn't impossible. Stocks can muster a convincing bear market rally following a crash. And this last occurred in the 1930s as the Dow almost doubled between 1933 and 1937.
Investors forget that previous secular bear markets - even during the Great Depression - resulted in formidable short-term gains for bottom fishers. Stocks might still break their October 2002 lows before stabilizing or reversing.
At some point; however, the market will rebound, if only for 12-36 months. If you believe this economic recession will be severe - and I do - then it won't be a straight line down for stocks.
I continue to focus on the 1930s for historical guidance today because it was a full-blown credit crisis accompanied by bank failures, massive deflation and a double-digit decline in GDP output.
In many ways, the situation now is far worse than back in the 1930s simply because the debt super-cycle is colossal. Governments, businesses and individuals hold more net debt than at any other time in history.
Deflation, which has arrived with a vengeance since July, makes debt servicing more expensive because assets they represent become harder to finance in a contracting economy. Those same assets, including real estate and stocks, for example, continue to decline in value further compounding the cost of borrowing or debt servicing.
From its peak in 1929 until 1932, the Dow Jones Industrials crashed a cumulative 86%. But starting in 1933 the Dow raced ahead with a 66.7% gain. From 1933 until 1937, the Dow doubled in value. By 1937, the global economy began deteriorating once more combined with political turmoil in Europe. The Dow plunged 33% in 1937 and began a five-year bear market until 1942.
But if an investor bought stocks in late 1932, he still would have been sitting on a profit by the end of 1937 - despite the big drop that year. It's a different story if an investor bought equities in 1929; where he would have waited 25 years to break-even.
Guessing the market's direction is largely a waste of time and I don't scratch my head every day wondering where stocks are heading. Yet it's instructive to see what happened in the early 1930s because we're on the same path. And judging by the last deflation, we're probably going to see new lows first for stocks followed by a major rally in the context of a secular bear market, similar to the 1933 to 1936 rally.
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This article has 9 comments:
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prudentinvestor
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163 Comments
Nov 14 07:28 AMI do think stocks are still headed lower, and for longer than most people expect, but don't think it be anything that bad.
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Groundhog
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10 Comments
Nov 14 07:52 AM-
monday1929
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83 Comments
My Website
Nov 14 08:21 AMOn Nov 14 07:52 AM Groundhog wrote:
> Uh...remember why we're in the mess we're in. All that wealth we
> thought we had was fantasy. Desperate to make up their losses, traders
> and speculators are writing a new fantasy tale everyday, and the
> financial media is trying to suspend our disbelief. Are we on the
> path to sustainable energy sources? Is Detroit making cars that people
> can afford to drive in the future? Does the USA have an industrial,
> manufacturing, agricultural, and services economy ready to meet the
> competetive challenges of the 21st century? Is our commercial utility
> infrastructure dynamic and robust? Are our urban youth staying in
> school and educating themselves for a prosperous future? Does our
> goverment operate on a balanced budget? Do I have a real job? Is
> my opinion worth the steam off of yesterday's you know what? The
> answer to all of these questions is no. So I don't think this is
> an economy worth investing in yet, and when it is, the investor will
> still have to pick and choose based on the financial fundamentals
> of individual corporations. Everyday is market day on Wall Street.
> Don't be distracted by the fanfare. Stay in your houses, if you still
> have one. This is the eye of the storm.
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investor88
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755 Comments
Nov 14 10:33 AMIt doesn't hurt to commit the above facts to memory although they say the past is not a predictor of the future. The above facts will form a solid framework for trading the present markets; those who win are those lucky or skillful enough to navigate these difficult times. Of course winning in current markets is more than remembering a little history here and there but the behavior of Dow 1929-1942 must be remembered by the serious trader.
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Roly
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7 Comments
Nov 14 10:41 AMBut from the peak in 1929 it took 25 years to reach the peak again, in 1954!
The lesson is: buy stocks only when you are young and have enough time and always take profit out when you have doubled.
Roly
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John Lounsbury
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652 Comments
My Website
Nov 14 02:11 PMOn Nov 14 08:21 AM monday1929 wrote:
> All of the problems you list were there at the 14,000 peak when most
> were bullish. I am as bearish as they come, and called this crash,
> but markets will have explosive rallies on their path to the low.
> This low could easily be in the 1,000-4000 area in the Dow. History
> supports a 60-100% rally at some point, and numerous 10-30% rallys
> will occur. One thing these rallys assure is that most investors
> stay long throughout the entire Bear market. The biggest , sharpest
> rallys occur in bear markets, Bull markets have sharp sell-offs to
> shake off most investors.
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granger
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289 Comments
Nov 15 03:10 PM-
nova
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98 Comments
Nov 15 11:33 PMLater, these industrial capabilities would transform America into the post-WW2 superpower that would last for almost 65 years. Having such enormous industrial capabilities, America was destined for a super recovery.
The present situation is much different. During the last 20 years, America was in a dis-industrialized mode. It major industrial capabilities were deliberately outsourced to Asia. American political, economic and academic elite lost any brains they ever had. The new slogan was "post-industrial society". Only feeble-minded people could assume that society could prosper being in a parasitic consumption mode producing nothing of value.
One can only wonder how such bizarre situation could last for so long. There is one explanation to it: America military-industrial complex. US military and defence-industrial complex were dominated the world.
However, lately, thanks to Afghanistan and Iraq, America military-industrial complex started deteriorate quite rapidly. American economy is not in a positions to support America military superpower status any more.
At the same time, China, Japan, India, Russia and Brazil continue it rapid industrial & technological developments.
Further complicating US economic recovery.
US economic downfall clearly cries for changes. However, US political and economic elite cannot see and/or doesn't understand the situation. In my view, the present US situation reminds me more of the former Soviet Union late in 1990s. There is no Soviet Union anymore but there is Russia who emerged from a catastrophe similar to one the USA is heading to.
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nova
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98 Comments
Nov 15 11:41 PMHowever, Dow at 3,000-4,000 is quite likely and even before 2009 year-end.