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The New Economy

Is Wall Street's rally real?

By / March 17, 2009

Employees of Barclays Capital worked the floor of the New York Stock Exchange Tuesday as the Dow staged a six-day 13 percent rally.

Mark Lennihan/AP

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Wall Street has staged an impressive six-day rally with the Dow Jones Industrial Average up 13 percent from its March 9 low.

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So what now?

Is this a temporary rise in a bear market or a Real Recovery. That's capitalized because, if true, it would be headline-worthy. The subhead: This Could be the Best Time in Decades to Invest in Stocks.

A slump from the past

Truth is, nobody knows whether this is a sucker's rally or the real thing. It will take weeks, and probably months, to know for sure. In the interim, the best we can offer is a little perspective.

The market has already experienced a downturn eerily similar to the first leg of the Great Depression. (How similar? Click here.) Then in just over two months – from Dec. 16, 1930, to Feb. 24, 1931 – the Dow Jones Industrial Average rallied a spectacular 23.4 percent.

But that rally didn't last. By July 1932, the index had fallen again – a breathtaking 78.8 percent.

Hoover-sized mistakes

Markets fell back then because the US government made several monumental errors that deepened the Depression, including the enactment of the Smoot-Hawley tariffs, which decimated international trade, and the Federal Reserve's tight money policy, which squeezed credit.

The good news is that so far, the Obama administration has avoided those mistakes. In fact, the Fed has swung to the opposite extreme and pursued a monetary policy so loose that it looks cockeyed. (Really. Click here.)

The not-so-good news is that this Great Recession is not a replay of the Depression and it may contain new pitfalls that no one knows about.

Beyond the rollercoaster

So one take away is that we don't know what we don't know. Just because traders feel better this week means absolutely nothing until the real economy begins to improve. (Click here to see how the latest signs are pointing.)

The other take away is that even in Great Depressions, markets swing wildly. Investors who are agile enough and disciplined enough can profit handsomely from the emotional ups and downs on Wall Street.

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