Markets
Stock Traders Should Heed the Lessons of the 1930s
The economic outlook is not unlike the Great
Depression years, and that didn’t turn out well
for equities.
Depression years, and that didn’t turn out well
for equities.
By
A. Gary Shilling
The stock market is fooling a lot of people these days.
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Follow @agaryshilling on Twitter
Don’t be fooled by the recent rebound in stocks; the
investment scene is beginning to resemble the
1929 market crash and the early
1930s Great Depression.
In the Roaring ‘20s, the Dow Jones Industrial Average jumped
500% from August 1921 to
September 1929. It then plunged 48% from Sept. 3 to
Nov. 13, 1929. To many, that seemed like
a reasonable correction of the 1920s
exuberance. The economy was fully employed and growing
rapidly and most looked
forward to more expansion and higher stock prices. Only days before the
crash,
prominent economist Irving Fisher stated that “stock prices have reached what
looks like a
permanently high plateau” and the market was “only shaking out of
the lunatic fringe.”
Also, a 48% stock drop wasn’t exactly unique. The Dow fell
48.5% from Jan. 19, 1906 to Jan. 7, 1907
in conjunction with the Panic of 1907.
Still, the economy didn’t collapse and stocks steadily recovered
to close at
the Dow’s old high by the end of 1909. If it hadn’t been for what followed, the
1929 Crash
would probably have been recorded as just one more correction in the
wild stock markets at that time.
Despite the widespread interest in equities
back then, only 10% of Americans owned equities
in the 1920s, according to the
Federal Deposit Insurance Corp.
So stocks rallied 48% until April 17, 1930, representing a
52% retracement. But as the Great
Depression unfolded, stockholders bailed out
or were sold out, and the Dow fell steadily until
July 8, 1932, an 86% swoon
and a drop of 89% from the September 1929 top.
False Dawn
That strong rebound in late 1929 and early 1930 turned out
to be a short blip in the stock market's
long decline
In parallel, the S&P 500 jumped 400% from March 9,
2009 to February 19, 2020. Then, fear
of the coronavirus deflated that index by
34% through March 23. But, as investors
anticipated control
of the virus and the effects of massive monetary and fiscal
stimulus, the S&P 500 jumped 32%
through April 29, offsetting 53% of
the earlier loss.
Will History Repeat?
Stocks have rebounded strongly in April, but the economic
outlook is less than promising
This looks like a bear market rally, similar to that in
1929-1930, with an additional 30% to 40%
drop in stocks to come as the deep
global recession stretches into 2021. In contrast, many look for
a V-shaped
economic rebound with a sharp recovery starting in the second half of 2020. A
Bloomberg
survey of economists foresees the economy contracting 3.7% this year
before expanding 3.8% in
2021, far above the 2.3% growth rate in the previous
expansion.
But bear markets that accompany recessions last about 11 months,
far longer than the recent slump.
According to Bank of America analysts, the U.S. stock market has never
reached its bottom in
less than six months after falling more than 30% in the
face of a recession.
The gigantic monthly and fiscal stimulus employed so far,
with more to come, are unlikely to offset
the massive disruption of the
coronavirus pandemic. Recall that the Federal Reserve’s decision to
cut its
benchmark interest rate to essentially zero coupled with the huge quantitative
easing after the
Great Recession did little to spur the economy, which grew at
the slowest rate of any post-World War
II expansion. Ditto for the gigantic 2009 tax cuts, rebates
and massive federal sending that together
amounted to 6% percent of gross
domestic product.
The total decline in stock wealth I foresee will knock 2.8%
off consumer spending. This pandemic
is likely to be the most disruptive
financial and social event since World War II with equally
long-lasting
consequences. Many will no doubt restrain spending in future years to rebuild
savings,
especially since the crisis caught them at a time of high debts and
short financial reserves. A Fed
study found that 40% don’t have enough cash on
hand to cover an unexpected $400 expense.
Also,
the $600 extra unemployment checks on top of state unemployment
benefits may induce some never
to return to work, especially since those
payments will probably be continued into 2021. The labor
participation rate for
working-age men has been falling steadily since World War II and from the
late
1990s for women.
A widespread economic revival is unlikely until a vaccine
and widespread testing are available.
Re-establishing supply chains will also
be a slow process. And, as seen now with China reopening,
a lack of demand from
domestic and foreign customers slows the revival. Plus, the lack of
international coordination to fight the coronavirus suggests a long recession.
In the world we foresee of slow economic growth and massive
debt overhang, every country wants
to export more to promote its local economy
and none are zealous for imports. So global supply
will continue to exceed
worldwide demand, resulting in even a bigger savings glut and making
chronic
deflation a serious probability. In the last two decades, consumer prices in
Japan have
fallen in most years and, as a result, real GDP growth has averaged
just 1.1%.
Gary Shilling at agshilling@bloomberg.net
To contact the editor responsible for this story:
Robert Burgess at bburgess@bloomberg.net
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