A Turn in the Tide – Part II

A Turn in the Tide – Part II

(Originally posted September 1999)
(Most recent Note Feb 2005)

     On October 25th,1929, William Hamilton, Editor of The Wall Street Journal, and the successor to Charles Dow, wrote in his most famous editorial “A Turn in the Tide”, that (two days earlier) the Dow Theory “gave the signal for a bear market in stocks“. He noted that “There are people trading in Wall Street, and many all over the country, who have never seen a real bear market…. What is more material is that the stock market does forecast the general business of the country. The big bull market was confirmed by six years of prosperity and if the stock market takes the other direction there will be a contraction in business later…”. Of course he did not expect the stock market to drop 86% from that point and business to enter a great depression, but both happened. The Dow Theory does not predict the duration nor extent of such changes, only that change is coming.

     In 1999, when the Dow Jones Industrial Average dropped below 10,466.93,  then the Dow Theory “gave the signal for a bear market in stocks“. Certainly “there are people trading in Wall Street, and many all over the country, who have never seen a real bear market“, in fact we have been in bull markets for 97% of the time over the last 17 years. And the rest of his quote is also correct: 82% of all bear markets in the 20th Century have been followed by “a contraction in business later” whether it be an official recession, or just a ‘mild’ or ‘growth’ one, or ‘really big one’ like the depression. Fortunately, most “real bear markets“, which I define as a drop of at least 16% on both the Dow Jones Industrials and the Standard & Poors 500 Index, are not as severe as the 1929-32 experience. They average a not insignificant -34% drop over an 18 month timeframe. The ‘traditional’ definition of a 20% drop is widely used but unfortunately excludes several “real” bear markets and their following recessions such as 1923, 1956-7, and 1978-80. Whichever definition you use, a Dow Theory ‘Sell’ signal has been followed by bear markets more times than not.

     I won’t dwell on the many similarities of the 1929 stock market and that of 1999, such as the record high price to earnings ratio, the price to book value, low dividend yields, etc, etc, etc. But one uncanny parallel you may not be aware of is the almost identical headlines out of Washington, D.C, then and now:

     In 1929, from the Chicago Tribune Press Service: “WASHINGTON, D.C., June 1 -(Special)- Rapid retirement of the public debt will continue to be an administration policy under President Hoover and Secretary of the Treasury Mellon. Despite a program for increased expenditures for public works and a possibility of another tax cut within a year or two, it is estimated that the outstanding public debt can be substantially wiped out within less than 18 years. Retirements through the sinking fund….will pay off the entire debt, now standing at a little less than $17,000,000,000, by 1947By adding to these debt retirements surplus revenues the debt can be paid off in a somewhat shorter period.”

     As for 1999, from www.whitehouse.gov came the following on February 17th: “Today, President Clinton will hold an event at the White House to discuss the importance of saving the majority of our future budget surpluses to ensure the long-term solvency of Social Security and Medicare and pay down the national debt, helping reduce the future burden on young people and grow the economy for years to come….By practicing fiscal responsibility, the Administration’s proposal will pay down nearly $3 trillion ($3,000,000,000,000) of our national debt….. President Clinton’s proposal would cut the debt held by the public, as a share of the economy, to 7.1 percent in 2014. This would mean that instead of leaving a mountain of debt for our children, we would completely eliminate the national debt by 2018.” Actually, on September 27th Clinton updated the above to “We can do all that and still have an affordable tax cut for the middle class and pay down our debt so that by 2015 we are debt-free for the first time since 1835, when Andrew Jackson was President.”

     The more things change, the more they stay the same. I wouldn’t expect 1999 to parallel 1929 exactly, only that the tide of the stock market had changed once again. We shall see.

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Feb 2005 Note:  THERE WAS A BEAR MARKET from January-March 2000 to September 2001 in which nearly 1 of 10 stocks lost 90% in value. The final low was 33 months later in October 2002 for a total loss by the Dow Jones Industrial average of nearly 38%, “somewhat” less than in 1929-32 but almost the exact same 34 month timeframe.

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