Haven’t We Been to this Show Before? (Note: Past Results are No Guide to Future Performance)
“There were fairly distinct indications, in last week’s stock market, that even professional Wall Street is getting back to a mood in which it will look at things as they are, and not necessarily as they would like them to be. Not much more than a month ago it was in that [latter] frame of mind; examining with great care actual returns of production, trade and employment and trying to discover, from these tangible facts, when the real turn for the better was likely to come. But the restless “professional” wearied of that. He may have seriously thought that cheap money in Wall Street would at once and automatically revive a business boom, irrespective of all other influences. He may actually have believed the stock market to be an independent industry not concerned with trade vicissitudes. Possibly, although not in himself the least deluded on either supposition, he may have imagined that the outside public would not have sense enough to see the fallacy. At any rate, a bold pretense was put up of retuning to [the bubble’s] speculation.”
– The New York Times – Opening paragraph of Financial Markets: A Changing Mood In Wall Street – Stocks and the Problems of Trade, April 21, 1930, four days after the DJIA hit the peak of the recovery rally about six months after the great crash of 1929…a level it was not to see again for nearly a quarter century (full article appended to this report).
About six months following the nadir of the Dow Jones Industrial Average’s roughly 50% decline from its bubble-era highs, it rose to 48% off its lows. Speculation that another bull market was in the offing, brought anxious capital back in from previously frightened traders. Unemployment threatened to define the economic picture in a way that hadn’t been seen in decades. The Federal Reserve and banks were lowering the cost of money to borrowers still able to borrow. Brokerage firms were re-hiring workers that had been let go in mass layoffs. Investment trust pools were all the rage – investing in assets at supposedly depressed prices. Favored stocks were being bid up, while talk abounded of ample cash on the sidelines. Corporate earnings were down, but the Street was pouring over any sign of the slight industrial improvement that had prevailed in the prior quarter, and ignoring any discouraging news.
You may have guessed that, by our use of the past tense, the foregoing refers to the “hope” rally of 1930.To say it is eerily on par with a description of the condition of today’s market (up until this week) is an understatement. Accordingly, instead of joining in the coming flood of one year anniversary pieces on 2008’s “Autumn of Anxiety,” we offer this 80th anniversary reflection on the events of 1929–1930. Not a Santayana-esque tome about being condemned to repeat a past we have forgotten, but some very interesting history it certainly can’t hurt market participants and policy makers to remember.
This is a week of vacations and contemplation at the end of an interesting summer. When we have time to rest and think, we also have time to muse. This piece stems from one such musing – a curiosity about how the market’s current behavior compares to the only other U.S. stock market meltdown to which it can be related. So, possible macroeconomic and market differences in the current state of affairs aside, we turned to history to illuminate the present. And – much as we can’t bring ourselves to believe that history will repeat itself as closely as it seems to be doing – possibly shed some light on the future.
A word of caution: We were going to subtitle this essay “Look Out Below,” but thought better of it. While we do believe that the degree of rebound in the equity markets this summer was a triumph of hope over reason, we caution the reader not to draw the less-than-tempting conclusion that all is headed to hell in a hand basket. The world today is, of course, vastly different than that of the 1930’s. But even the most unrepentant bulls out there might follow along and muse wondrously along with us. Any conclusions we leave to the reader.
Two Crashes and “Hope Rallies”
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Daniel Alpert is a Managing Director and Founding Partner of the New York investment bank Westwood Capital, LLC, and its affiliates. He is a frequent commentator on the housing and credit crises on the CNBC, FoxBusiness and Bloomberg networks, as well as in leading newspapers, periodicals, and websites.
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