1929 And Today - Sobering Parallels Abound
* By Simon Maierhofer
* On 1:14 pm EDT, Thursday October 15, 2009
http://finance.yahoo.com/news/1929-And-Today-Sobering-etfguide-2101131945.html?x=0
1929 And Today - Sobering Parallels Abound
When was the last time you saw stocks decline 54% followed by a 55% rally?
When was the last time you saw stocks (NYSEArca: VTI - News), bonds (NYSEArca:
AGG) and commodities (NYSEArca: DBC - News) move in sync for nearly two years?
When was the last time asset allocation did not really provide the diversification and protection it was supposed to?
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.
But who cares about history when the market is up and the forecasts call for better days ahead. The Dow Jones (DJI: ^DJI) broke the 10,000 for the first time in over a year, the S&P 500 (SNP: ^GSPC) rallied over 55% and the Nasdaq (Nasdaq: ^IXIC) has soared nearly 70%. Wall Street is anxiously expecting another earnings season, which is expected to be predominantly good.
If there is one thing we should have learned from history, it's that the bear strikes hardest when least expected. Pierre Corneille hit the nail on the head when he said that 'danger breeds best on too much confidence.'
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.
In January 2009, with the Dow Jones slightly above 9,000, the ETF Profit Strategy Newsletter noticed elevated levels of optimism and warned of a severe decline with a target of Dow 6,700. Today, sentiment readings are even more extreme than they were in January. The implications are obvious.
If there is just one time you want to take a lesson from history, it is RIGHT NOW. The parallels between today and the Great Depression are numerous and strikingly similar. This 5-minute history lesson might be the best investment you'll ever make.
Optimism preceded the 1929 and 2007 market tops
Even though a major storm was brewing, prior to the 2007 market top, Wall Street saw no 'cloud in the sky.' In its Global Economics Report, released in the summer of 2007, Merrill Lynch's analysts published the following outlook: 'The Merrill Lynch global economics team believes that the economy will continue to grow in 2007 - with no sign of a significant cyclical slowdown.'
From 2007 to 2009, the major indexes declined some 50%.
On December 4, 1928, President Coolidge sent the following message on the state of the Union to the reconvening Congress: No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. You may regard the present with satisfaction and anticipate the future with optimism.'
A few days before leaving office in 1929, the parting President cheerfully observed that the economy was absolutely sound and that stocks were cheap at current prices.
Following the 1929 highs, the Dow Jones (NYSEArca: DIA - News) 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.
On March 25, 1930, just a few weeks before the waterfall decline resumed, the New York Times reported that 'Wall Street was in a cheerful frame of mind as a result of numerous vague reports of improvement in business and industry.'
Once the bear market resumed, it erased another 86% of the Dow's value.
Following the 54% 2007 - 2009 decline, the Dow Jones rallied 54%. So far, the Dow has retraced 45% of the points lost in the initial decline. The 50% mark, a Fibonacci retracement level, often exercises a magical pull and provides an upper target for bear market rallies (chart below includes data up to 8-15-09).
Similar to the 'vague reports of improvements' reported in 1930, today's 'good news' reports are merely an adaption to lower expectations; many consider it the new normal. Just like in 1930, vague reports of improvements (in 2009 they've become known as 'green shoots') are enough to propel stocks. For savvy investors, the parallels between the two declines and subsequent rallies are certainly too close for comfort.
It all started with real estate
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. Talk about jumping out of the frying pan and into the fire.
continued below
* By Simon Maierhofer
* On 1:14 pm EDT, Thursday October 15, 2009
http://finance.yahoo.com/news/1929-And-Today-Sobering-etfguide-2101131945.html?x=0
1929 And Today - Sobering Parallels Abound
When was the last time you saw stocks decline 54% followed by a 55% rally?
When was the last time you saw stocks (NYSEArca: VTI - News), bonds (NYSEArca:
AGG) and commodities (NYSEArca: DBC - News) move in sync for nearly two years?
When was the last time asset allocation did not really provide the diversification and protection it was supposed to?
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.
But who cares about history when the market is up and the forecasts call for better days ahead. The Dow Jones (DJI: ^DJI) broke the 10,000 for the first time in over a year, the S&P 500 (SNP: ^GSPC) rallied over 55% and the Nasdaq (Nasdaq: ^IXIC) has soared nearly 70%. Wall Street is anxiously expecting another earnings season, which is expected to be predominantly good.
If there is one thing we should have learned from history, it's that the bear strikes hardest when least expected. Pierre Corneille hit the nail on the head when he said that 'danger breeds best on too much confidence.'
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.
In January 2009, with the Dow Jones slightly above 9,000, the ETF Profit Strategy Newsletter noticed elevated levels of optimism and warned of a severe decline with a target of Dow 6,700. Today, sentiment readings are even more extreme than they were in January. The implications are obvious.
If there is just one time you want to take a lesson from history, it is RIGHT NOW. The parallels between today and the Great Depression are numerous and strikingly similar. This 5-minute history lesson might be the best investment you'll ever make.
Optimism preceded the 1929 and 2007 market tops
Even though a major storm was brewing, prior to the 2007 market top, Wall Street saw no 'cloud in the sky.' In its Global Economics Report, released in the summer of 2007, Merrill Lynch's analysts published the following outlook: 'The Merrill Lynch global economics team believes that the economy will continue to grow in 2007 - with no sign of a significant cyclical slowdown.'
From 2007 to 2009, the major indexes declined some 50%.
On December 4, 1928, President Coolidge sent the following message on the state of the Union to the reconvening Congress: No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. You may regard the present with satisfaction and anticipate the future with optimism.'
A few days before leaving office in 1929, the parting President cheerfully observed that the economy was absolutely sound and that stocks were cheap at current prices.
Following the 1929 highs, the Dow Jones (NYSEArca: DIA - News) 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.
On March 25, 1930, just a few weeks before the waterfall decline resumed, the New York Times reported that 'Wall Street was in a cheerful frame of mind as a result of numerous vague reports of improvement in business and industry.'
Once the bear market resumed, it erased another 86% of the Dow's value.
Following the 54% 2007 - 2009 decline, the Dow Jones rallied 54%. So far, the Dow has retraced 45% of the points lost in the initial decline. The 50% mark, a Fibonacci retracement level, often exercises a magical pull and provides an upper target for bear market rallies (chart below includes data up to 8-15-09).
Similar to the 'vague reports of improvements' reported in 1930, today's 'good news' reports are merely an adaption to lower expectations; many consider it the new normal. Just like in 1930, vague reports of improvements (in 2009 they've become known as 'green shoots') are enough to propel stocks. For savvy investors, the parallels between the two declines and subsequent rallies are certainly too close for comfort.
It all started with real estate
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. Talk about jumping out of the frying pan and into the fire.
continued below
