October 20, 2009

1929 and today

I'll start out by telling you that I am not bearish, just cautious.  I noticed this article by ETF newsletter, good stuff on the parallels between 1929 and today.

When was the last time you saw stocks decline 54% followed by a 55% rally?

When was the last time you saw stocks, bonds and commodities move in sync for nearly two years?

When was the last time, a ten year investment in the stock market delivered negative returns?

Investors that care to harken back 80 years will find that the 1929 - 1932 era is the only period of time that compares to today. In fact, the parallels between now and then are bountiful and scary.

If there is one thing we should have learned from history, it's that the bear strikes hardest when least expected.  The market always tries to inflict the maximum amount of pain.

Black Monday's or Thursday's wouldn't be called 'black' if they were expected. Market tops are always marked by extreme levels of optimism.

From 2007 to 2009, the major indexes declined some 50%.  Following the 1929 highs, the Dow Jones declined 48%.  The market rallied 50% in 1929/1930 and today.

Following the initial 48% decline in 1929, the Dow Jones rallied 48% within a period of six months. This rally was powerful and retraced 52% of the Dow points lost in the initial decline. Even though the market was far from its previous highs, investors had once again gotten excited about owning stocks and felt confident that the market would continue to move higher.

Once the bear market resumed, it erased another 86% of the Dow's value.

Did you know that the Great Depression was preceded by a great real estate boom centered in Florida? The Florida real estate bubble burst in 1926, three years before equities. Just as we've seen recently, investors took their leftovers from the real estate bust and poured it into stocks.

The bear market from the 2007 highs has humbled all markets: large cap stocks, mid cap stocks and small cap stocks. Defensive sectors such as consumer staples and aggressive sectors such a consumer discretionary. Global developed markets and emerging markets too.  This unique 'red across the board' behavior has not been seen in the 70s, 80s or 2000 bear markets. The only other similar time period to be found is during the Great Depression.

If this sounds impossible, consider that the Dow Jones measured in the only true currency, gold, has already declined over 80%.  To reset valuations, the Dow Jones measured in dollars will have to follow.  Its already happened in Japan, the Nikkei has lost as much as 80% since its 1990 all-time high.

Can it happen again, possibly, the only way out is would be the growth/industrialization of China and India.

As people who attend my webinars or teleconferences know, I am wary of most people investing much in stocks anyway but this is a period in time where even savvy investors need to be extra cautious and lighten up on equities.  As I always say, there is nothing wrong with a nice safe CD at your local bank.

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