In 1929 the Great Depression started, the market highs did not return until 26 years later. Back then, the currency was tied to gold. Banks and governments couldn't just 'inject' money into the system. So crawling back to new highs took 26 years. This time around I am thinking maybe 3 to 10 years to get back to the old highs. But for now, lets look at the stock market chart of 1929, notice the nice steep drop from ~375 to 200, a drop of 46%, then a counter rally to about 290, which is a little over 50% of the drop being covered. Next up, lets look at today
Notice that the SPX market dropped from about 3400 down to 2190, a 36% drop, with a retrace from 2190 to 2880, a counter rally of about 57%.
Both drops are 36-46% range, the drop took 35 days and now it took 16 days, both counter rallies are 50-57% range. History doesn't repeat but it often rhymes. This past Friday and today are excellent times to lighten your long positions, I did.
But this isn't a Great depression right? Well in 1929 the total USA unemployed went from 1.5 million in 1929 to 12 million in 1932, a 700% increase to 23% of the workforce over 3 years. In 2020 unemployment went from 5.7 million to about 22 million in about four weeks, a 285% rise to about 14% of the workforce. The total workforce in 2020 is about 158 million people that could work, but then tack on 13.5 million in disability program that didn't exist in 1929, making it a 171 million potential workers. A total of 35 million out of work is about 20% of the 171 million potential workers circa 1929 measurements. Again, things aren't exactly the same, but there are parallels.
Do I think the market will take 26 years to new highs? Not a chance, it will be much shorter. Do I think next year will be making new market highs through end of 2022 (adjusted for currency valuation)? Not a chance.
The economy has been hit with a big blow. We are injecting money into the system that could NOT have been done in 1929, this alone will change how this plays out. But pushing money from the top won't work quickly. If we start giving out direct payments to displaced workers completely different story, the rebound will be very quick. But pushing money through banks and financial companies doesn't automatically put money into people's pockets. They have to be employed and get a wage equal or better than before the bust to return to same valuation. To boot, we have no idea how to return to normal business and sustain it over the next year!
If we take the hard nose American route of don't dole out money to people, but give money to companies, I expect this to last much longer as we need to regain spending and employment back to January before the market can sustain new highs and keep them.
Winston Churchill said “You can always count on the Americans to do the right thing after they have tried everything else.”
And that will determine how long the downswing lasts. Not wishful thinking, praying, not democrat vs republican, not Trump vs Biden, just actual action to help restore the economy through the consumers.
Like we did in the Great Depression with the then new social safety net, it needs to go to the next level. I am investing relying on Churchill's wisdom, and will go all into the market when we do the right thing.
Great stuff. Thanks for sharing.
ReplyDelete