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D. Frank Norton: Comparing today’s stock market versus the 1930s

It’s Your Money

Posted: February 4, 2009 11:47 p.m.
Updated: February 5, 2009 4:55 a.m.
The S&P 500 dropped 52.98 percent from its all-time high on Oct. 9, 2007, to its Nov.21, 2008 low.
Is this unprecedented? Not really.

In the past 80 years, the U.S. stock market has had four declines of 50 percent. The worst decline was during the 1929 to 1932 period when the Dow Average dropped 89.24 percent from its 1929 high to its 1932 low.

The infamous stock market crash of 1929 was actually a two-day affair on Oct.28 and 29.

The Dow fell 13.47 percent and 11.73 percent on those days, respectively. The Dow fell an additional 15 percent over the next couple of weeks and finally put in a temporary bottom on Nov. 13, 1929.

At that point, the Dow was down 49.4 percent from its peak. (Note that the bottom date for the very recent bear market was Nov. 21, and the Dow declined 48.2% from its high. An interesting similarity.)

After the post-crash "50 percent off" sale in 1929, the Dow proceeded to go up 52.18 percent from Nov. 13, 1929, to April 16, 1930.

It then got massacred over the next couple of years.

We should not see an 89 percent stock market decline this time around for the following reasons:

1. In the eight-year period leading up to the 1929 crash, the Dow had quintupled.

During the 2002 to 2007 bull market, the S&P went up only 101 percent and the Dow increased by 95 percent.

The S&P increased by only 1.4 percent from March 10, 2000 high to the all-time high of October 11, 2007 - a time span covering seven and a half years. In October 2007, the traumatic 2000 to 2002 bear market was still fresh in investors' minds and investors were guilty of complacency, not of participating in a speculative frenzy. The September 1929 Dow was much more like March 2000 Nasdaq.

The Nasdaq had run up over 700 percent in the eight years leading to its 2000 peak before crashing 78 percent.

2. From Sept. 1, 1929, to July 1, 1932, the U.S. experienced 21.3 percent deflation.

Therefore, while the Dow went down 89.4 percent, the purchasing power loss was "only" around 68 percent.

Although the last five months have produced a negative Consumer Price Index (CPI) number, since October 2007 the U.S. has experienced inflation, not deflation. Fifteen months after the 2007 peak, we have had net inflation, which is the opposite of the first 15 months of the 1929 to 1932 bear market.

The 1929 to 1942 period offers a very interesting comparison:

* In 1929-1932, the Dow experienced an epic bear market that lasted 2.8 years.

* In 2000-2002, the Dow experienced an epic bear market that lasted 2.7 years. 

* From July 1932 low to the March 10, 1937 high (4.7 years), the Dow went up 281 percent.

* From The October 2002 low to the October 2007 high (five years), the Dow went up 95.98 percent.

* From the March 1937 high to the March 31, 1938 love (1.05 years), the Dow went down 50.15 percent.

* From the October 2007 high to the November. 21, 2008 low (1.11 years), the Dow went down 48.23 percent.

So what happened next in 1938?

The good news is that the Dow proceeded to go up 62.97 percent from March 31, 1938, to Nov. 10, 1938. The bad news is that it was just a bear market rally, but what a rally it was.

However, the 1938 low held for over four years until World War II proved to be too much for the market to overcome.

In essence, the market went into a multiyear trading range. From 1937 to 1942, there were no fewer than three bear market rallies of at least 25 percent. All of them eventually failed. However, the ultimate low in 1942 was less than 5 percent below the 1938 low.

So, what can we take from all of this to apply to our current bear market situation?

1. Mr. Stock Market does have the capability of rising dramatically even with such bad economic news facing us.

2. We may be in for an extended period of market bouncing up and down within a broad trading range.

3. For those who are buy and hold passive investors, it may be wise to move to safer investment havens for the time being.

4. For those willing to be more proactive with their investing, moving into the market during times the market approaches the bottom of its range and then pulling back when the market approaches the top of its range, may be a viable investment strategy. However, this is not a strategy for those whose emotions get the better of them. Inevitably, the wrong trading decision is made when emotions dictate our investment actions.

D. Frank Norton is a money manager and financial planner in Santa Clarita. "It's Your Money" appears Thursdays and rotates between a handful of the Santa Clarita Valley's financial professionals. His column represents his own views and not necessarily those of The Signal.


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