Market rally like the 1970s?
In the 1970s, a bear market was disguised by a series of market rallies. Some think a similar phenomenon might be occurring now.
02/17/10 London, England – Yesterday’s big move in the Dow throws us back to our customary position – uncertainty, bordering on da-daism. The Dow rose 169 points yesterday. Gold shot up $29 to $1119.Skip to next paragraph
Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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“I think, therefore I am,” said Rene Descartes. How did he know he thought? And what if he thought he wasn’t? Would he not be? He should have tried following the stock market! It would have improved his philosophy. “I think I think,” he would have emended his famous quotation. “But maybe I don’t…”
Yesterday morning we were uncertain about the direction of the stock market. By evening, we weren’t so sure… We thought the markets were headed down. But yesterday’s strong showing puts our hypothesis in doubt.
Why should stocks go down? Because they’re-priced for a strong recovery. But we’re not getting a strong recovery. We’re not getting any recovery at all. Investors were bound to notice, sooner or later.
A new index of the trucking industry – based on how often they fuel up their big rigs – fell 37% in January, from a big rise in December. Neither unemployment nor housing show any sign of real improvement.
And yet…there is still no big sell-off in the stock market. Why?
Our old friends Mary Anne and Pam Aden recently suggested that this market was like the period in the ’70s when a bear market had already begun – years before – but which was marked by a couple of major rallies. The rallies lasted about 17 months each. And each time, the Dow approached its previous high.
Hmmm…maybe they’re right. This rally could go all the way to the summer.
Let’s put the all-time high of the US stock market at January 2000. The Dow had gone up about 11 times since its low in 1982. Then came the bear market. First, the Dow got whacked in 2001. And the government came in with the largest stimulus package the world had ever seen. That brought about a rally…a large rally…that took the Dow over 14,000 – well over the previous high. Even so, if you adjust the Dow for inflation it made no real progress. And then, in 2007, the Dow got whacked again. This brought the Dow down below 7,000, reaching its low point last March. Since then, stocks have been rebounding.
A typical bounce – if anything is typical – takes a few months and recovers about half of what was lost. This bounce is typical in that it recovered about half of what was lost. But it has gone on for much longer – like the big bounces of the ’70s.
How did the ’70s period end? Inflation increased and the Dow sank. It didn’t hit its final low until August 1982. But at that point, stocks were undeniably cheap. You could buy the Dow for about 5 times earnings.
Will we relive the ’70s?