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History says stocks on Wall Street may be poised for a comeback.
BOSTON — The stock market is often uncannily prescient when it comes to anticipating better days ahead. Long before the finest minds are able to script out a path to economic recovery, military victory, or whatever it is that plagues the world — stock markets rally. With very few exceptions over the past 100 years, markets have rallied some six to nine months before the end of an economic downturn. Typically the more severe the decline in share values, the more vigorous the subsequent rallies that follow.
Stocks tend to hit rock bottom when hope has been extinguished, when the world looks down a long, dark tunnel only to see pitch black. As the first thin rays of light appear far in the distance, they are invisible to the naked eye of even the most cunning seers. Yet they are mysteriously identified by the night-vision goggles of the market.
The reasons for this are the subject of much debate. Of course the stock market is notorious for its drunken follies during the late stages of bull markets, such as we witnessed during the dot com euphoria of the late 1990s. But let’s look at some of the major bottoms in the U.S. stock market. The market’s predictive prowess comes to play most often towards the end of deep and scarring bear markets. It is then, in its sober wisdom, that the stock market so often detects those signals of hope that are inaudible amid the static of noisy pessimism.
Take July 1932, when the Dow Jones Industrial Average sank to its Depression-era low of 41 points before rallying to more than 100 by the end of 1933, a gain of more than 140 percent. The newspapers of July 1932 reflected a nation paralyzed by fear, poverty and hopelessness. The market’s rise off the low was due, in retrospect, to the early and fragile hope that Franklin Delano Roosevelt, widely expected to win the November election, might actually deliver on what began as just a campaign slogan: “I pledge you, I pledge myself, to a new deal for the American people.”
The economic statistics that coincided with the powerful 1932-1933 rally are grim. Unemployment continued to rise in 1933 to a level of nearly 25 percent while the economy continued to contract. Yet the market correctly identified that at least some of the many economic and social initiatives of the early 1930s would eventually gain traction and arrest the decline in economic activity.
The low made during WWII is equally illustrative. It occurred in the spring of 1942, a time when Japan’s string of successes throughout the Pacific was stunning and the German move eastward into Russia looked unstoppable. The Dow hit 93 before rallying to around 145 by late summer 1943, a 56 percent move.
In his book, "Wealth, War, and Wisdom," former chief investment strategist for Morgan Stanley Barton Biggs writes:
"The New York stock market recognized that the victories at the battles of the Coral Sea and Midway in May and June of 1942 were the turn of the tide in the Pacific, and from the lows of that spring never looked back, but I can find no such thoughts in the newspapers or from military experts of the time. A barrage of defeats and surrenders had engendered intense criticism of the management of the war and the commanders in the field. The wise men of the media were so busy wringing their hands that they didn’t grasp the significance of the battles of the Coral Sea and Midway as the high-water mark of Japan’s grand design for empire and of its attack on the United States."
A final important market low worthy of examination took place in December 1974. It occurred against the backdrop of a country numb from Nixon’s resignation in August of that year and the impending collapse of the South Vietnamese regime (the fall of Saigon would take place in April 1975). The Dow advanced from 577 in December 1974 to 879 in June 1975, just six months later, for a return of 52 percent.