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Published: September 15, 2009
"The economy is showing unquestionable signs of life," says
Labor Secretary Davis on September 12, 1930.
The stock market collapsed 48% in the Great Crash of 1929. But
by 1930, it had found a bottom and started rallying again. This
rally erased all the pessimism generated by the Great Crash and
enticed investors back into the stock market again.
By April 1930, the stock market had gained 48%. By September
1930, investors were feeling the same tentative optimism we're
feeling today...
This morning, I scanned a list of Wall Street Journal
headlines from September 1930.
"We have passed the low point of the depression," says R.
Proctor, President of the New England Council, on September 13,
1930.
"Over 75% of brokerage houses now recommend buying stocks," says
a headline from September 14, 1930. "Brokers, businessmen and
even the general public are more optimistic."
Another story from the same edition reports some retailers have
been "caught unawares" by an improvement in business since Labor
Day. Some shoppers have had "difficulty finding goods," added
the writer.
In the September 12 edition, a banking industry journal reports
a slight improvement in trade and industry over the previous
month. The National Council of American Shipbuilders says U.S.
shipbuilding has doubled in the past year. A cement manufacturer
reports production up 5% in August over July levels. And a
railroad sees bigger profits in 1931 as revenues increase and
costs fall.
Here's the thing: The stock market collapsed almost immediately
after the WSJ published these optimistic headlines. Three months
later, it had fallen 37%. Over the following three years, the
Great Depression intensified. Unemployment jumped to 25%,
thousands of banks collapsed, and world trade evaporated. By
July 1923, the Dow had fallen 89% from its peak.
Old timers say investors lost more money in the rebound than
they did in the initial crash of 1929.
We're in the same situation today. First, we had a 50% crash.
Then, we got a 50% bounce. The bounce has been so strong, it's
caused the country's mood to change from deep depression to
cautious optimism. President Obama made a speech on Wall Street
yesterday. "The storms of the past two years are beginning to
break," he said.
It's tempting to conclude a major collapse is coming in the
stock market as we follow the path laid out by the Great
Depression.
But I don't think that's likely.
My best guess is, we'll get a
"sandpaper" market. We use the
guillotine-and-sandpaper model to
analyze bear markets. The guillotine
is the first stage of the bear
market, right after the bubble
bursts. You get a quick, dramatic
collapse like we had in 2008. Then
you get the sandpaper stage. Stock
prices fall gradually in a narrow
range. The sandpaper stage
frustrates both bulls and bears as
prices oscillate without any clear
trend.
But that's just my best guess. The
real conclusion of this essay is:
Don't pay any attention to the
newspapers, the media, or the
purported "experts" when making
investment decisions. These opinions
have no value when it comes to
forecasting the direction of the
stock market or the economy. They
were wrong in September 1930, and my
bet is they'll be wrong again
today...
Instead, you should let the market
tell you what to do. In
DailyWealth, we often talk
about watching the price of common
building materials, like
lumber and
copper. If these materials
plunge in price, it means much more
than a news headline.
We also like to track bonds, with
shares of the
big bond fund (NYSE: LQD). The
bond market is larger and more
important than the stock market. If
LQD makes meaningful new lows, it's
a sign businesses can't service
their debts... which would be
disastrous.
I lean toward believing these
all-important indicators will turn
lower soon... and then we'll get the
sandpaper.
-- Tom Dyson
Contributing Editor
Daily Wealth |
