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Stock market crash: Think 1938, not 2008
Stock market debacle does not necessarily signal a spectacular crash. The stock market may be reacting to prospects of a garden-variety recession.
Having lunch with Barry the other day (not salads) we got to talking about why it seems so hard for people to accept that the economic & stock market picture has grown darker over the last few weeks. What's so bad about a correction or a consolidation period? What's the harm in admitting that the Recovery is backsliding?
Investor reaction to President Roosevelt ending the stimulus & the Federal Reserve tightening was a stock market plunge in 1938. But it didn't foreshadow another great calamity, just a regular recession. Within 13 months the economy had regained its footing & the market never came close to its 1932 lows.
Investor reaction to President Roosevelt ending the stimulus & the Federal Reserve tightening was a stock market plunge in 1938. But it didn't foreshadow another great calamity, just a regular recession. Within 13 months the economy had regained its footing & the market never came close to its 1932 lows.
Joshua M. Brown
I always just assumed that the talking heads were perma-bullish for the money - most of them don't get paid unless you're fully invested (which is why there's a "let's put some money to work" bias in the asset management game). But Barry explained that it goes beyond that.
For starters, people have trouble saying one thing & then coming around & admitting that things have changed. There is a disconnect in the way our brains work which leads us to believe, on some level, that having new opinions is somehow a betrayal of our old opinions, even in the presence of fresh evidence. This is doubly true of those who predict & prognosticate in public for a living - they feel the need to be consistent lest they lose the role they've been cast in (perma-bull, doomsayer, wacky next-door neighbor etc).
In some cases, there is a political angle to it as well. I had clients who said they would never buy a stock as long as Obama was president...I wonder how they're doing these days. There are pundits who're funded by think tanks who pretend to be in the business of analysis but are really engaged in the art of slant & spin - positive or negative depending on who the paymaster is. There's a regular guest in Kudlow's menagerie who both cheerleaded the Bush stock market right off the cliff in 2007 only to predict the next Great Depression at the market's lows early in Obama's term.
But the main reason why so many people have such trouble reconciling improving or deteriorating economic data & stock market conditions is the Recency Effect. Barry says that because the wounds of 2008 are still so raw, people see the next 2008 in every setback. They forget that if we have a double-dip recession, it can be just a garden-variety recession. It doesn't have to be another apocalyptic, world-stopping calamity.
Let us say we do fall into a double dip as all that spent stimulus wears off, a regular recession without all the fireworks & institutional failures of the last one is not only possible, it is more likely.
In other words, think 1938 & not necessarily 2008.
RELATED: four factors behind investor pessimism
Above is a killer annotated chart of the Dow Jones Industrial Average during the late 1930's I whipped up for you guys...
Without having the ancient economist battle of what caused the US economy to recede in 1937-1938 (Keynesians say the cessation of Federal spending, Monetarists say the Fed tightened too soon), we can all agree that FDR did pull back on the two main programs (Works Progress Administration & Public Works Administration) in the spring of 1937 & that the Fed was hawkish.
The stock market had been steadily recovering from the depths of 1932 (the Dow had hit 56 that year) & from early 1935 through 1937 it staged a furious two-year rally that took the average from 102 to 186, a double (sound familiar?). When the first signs of a slowdown hit, there was a brief sell-off, followed by a sharp recovery in stocks - & then as the data worsened & the Fed sat on it is hands, off the cliff the markets went.
But it was not the end of the world, just a retracement of half the gains from the 1932 lows (but not all of them) & within 13 months, the economy regained its footing into the 1940's (with a little help from Hitler & Tojo).
The point is, the 1938 recession wasn't pleasant (unemployment jumped from 14.3% up to 19% that year) & the stock market certainly felt it, but then life went on. Most of the spectacular corporate failures & life-altering, forced migrations had already occurred in the early part of that decade, 1938 was a mere shadow of that.
It is too early to call a double dip recession as being imminent or inevitable, but it is never too early to mentally prepare for one.
My advice is to stop thinking 2008 & instead start thinking 1938 or 1953 or 1969 or 1981, you get the drift. Not every slowdown is a crash & we are in a secular bear market after all.
By Joshua M Brown, http://www.csmonitor.com/About/Contact-Us-Feedback
Other artickle
I always just assumed that the talking heads were perma-bullish for the money - most of them don't get paid unless you're fully invested (which is why there's a "let's put some money to work" bias in the asset management game). But Barry explained that it goes beyond that.
For starters, people have trouble saying one thing & then coming around & admitting that things have changed. There is a disconnect in the way our brains work which leads us to believe, on some level, that having new opinions is somehow a betrayal of our old opinions, even in the presence of fresh evidence. This is doubly true of those who predict & prognosticate in public for a living - they feel the need to be consistent lest they lose the role they've been cast in (perma-bull, doomsayer, wacky next-door neighbor etc).
In some cases, there is a political angle to it as well. I had clients who said they would never buy a stock as long as Obama was president...I wonder how they're doing these days. There are pundits who're funded by think tanks who pretend to be in the business of analysis but are really engaged in the art of slant & spin - positive or negative depending on who the paymaster is. There's a regular guest in Kudlow's menagerie who both cheerleaded the Bush stock market right off the cliff in 2007 only to predict the next Great Depression at the market's lows early in Obama's term.
But the main reason why so many people have such trouble reconciling improving or deteriorating economic data & stock market conditions is the Recency Effect. Barry says that because the wounds of 2008 are still so raw, people see the next 2008 in every setback. They forget that if we have a double-dip recession, it can be just a garden-variety recession. It doesn't have to be another apocalyptic, world-stopping calamity.
Let us say we do fall into a double dip as all that spent stimulus wears off, a regular recession without all the fireworks & institutional failures of the last one is not only possible, it is more likely.
In other words, think 1938 & not necessarily 2008.
RELATED: four factors behind investor pessimism
Above is a killer annotated chart of the Dow Jones Industrial Average during the late 1930's I whipped up for you guys...
Without having the ancient economist battle of what caused the US economy to recede in 1937-1938 (Keynesians say the cessation of Federal spending, Monetarists say the Fed tightened too soon), we can all agree that FDR did pull back on the two main programs (Works Progress Administration & Public Works Administration) in the spring of 1937 & that the Fed was hawkish.
The stock market had been steadily recovering from the depths of 1932 (the Dow had hit 56 that year) & from early 1935 through 1937 it staged a furious two-year rally that took the average from 102 to 186, a double (sound familiar?). When the first signs of a slowdown hit, there was a brief sell-off, followed by a sharp recovery in stocks - & then as the data worsened & the Fed sat on it is hands, off the cliff the markets went.
But it was not the end of the world, just a retracement of half the gains from the 1932 lows (but not all of them) & within 13 months, the economy regained its footing into the 1940's (with a little help from Hitler & Tojo).
The point is, the 1938 recession wasn't pleasant (unemployment jumped from 14.3% up to 19% that year) & the stock market certainly felt it, but then life went on. Most of the spectacular corporate failures & life-altering, forced migrations had already occurred in the early part of that decade, 1938 was a mere shadow of that.
It is too early to call a double dip recession as being imminent or inevitable, but it is never too early to mentally prepare for one.
My advice is to stop thinking 2008 & instead start thinking 1938 or 1953 or 1969 or 1981, you get the drift. Not every slowdown is a crash & we are in a secular bear market after all.
By Joshua M Brown, http://www.csmonitor.com/About/Contact-Us-Feedback
Other artickle
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