Last month marked the 75th Anniversary of the Great Crash of 1929, which kicked off the Great Depression. Looking back, there are many lessons to learn from it. In today’s market, those lessons may be applied as: buy bonds, real estate, and gold coins. And sell stocks . . .
It was a ho-hum opening at the stock market on the morning of October 24, 1929. Prices were firm at the open, and trading volume was high. Then prices began to sag. Prices fell faster and faster, until the old-fashioned tickertape could no longer keep up. It had started as a regular day, but “by eleven o’clock, the market had degenerated into a wild scramble to sell,” says John Kenneth Galbraith in his 1954 book “The Great Crash”.
It was the Roaring Twenties, and the Dow Industrials had hit its high in September of 1929 at 386. Stocks wouldn’t surpass their 1929 highs again until 1954 — 25 years later — the year that Galbraith’s book was published. In the book, Galbraith sums up what it felt like at that time in words better than I could hope to muster (from pages 108-109): “The singular feature of the Great Crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune.
“The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. Not only were a record 12,894,650 shares sold on October 24; precisely the same number were bought. The bargains then suffered a ruinous fall.
“Even the man who waited out all of October and all of November, and saw Wall Street become as placid as a produce market, and who then bought common stocks, would see their value drop to a third or a fourth of the purchase price in the next 24 months.
“Monday, October 28, was the first day on which this process of climax and anticlimax ad infinitum began to reveal itself. It was another terrible day. Volume was huge . . . indeed the decline on this one day was greater than all the preceding week of panic. On this day there was no recovery. . . . Tuesday, October 29, was the most devastating day in the history of the New York stock market, and it may have been the most devastating day in the history of markets.”
But as Jim Grant pointed out in a recent issue of Forbes magazine, “With a little more foresight, Galbraith could have written a predictive work entitled ‘The Great Bull Market,” since the averages were, indeed, poised for liftoff. Then again, in 1954 a bullish book would probably have undersold a bearish one. Famously, people are bullish at the top and bearish at the bottom.”
That is one important lesson from the Great Crash: People ARE famously bullish at the top and bearish at the bottom.
Right now, based on history, we’re still closer to the top than the bottom. Even though stocks have fallen dramatically in the last four-and-a-half years, stocks are still as expensive today as they were at the stock market peaks in the late 1920s and late 1960s. Stocks aren’t a bargain yet.
So one lesson we could take from Galbraith is that even though stocks have been “as placid as a produce market” this year, it doesn’t mean the bear market is over. Stocks could still lose half their value before the great bear market we’re in ends, based on the last two great bear markets. Now is definitely not the time to “back up the truck” and buy.
Following Jim Grant’s line of thinking, we’ve got to consider SELLING what people are excited about buying and we’ve got to consider BUYING what people are bearish on.
So what are these things? A recent issue of Barron’s provides these clues: The “big money” managers are bullish about stocks, and they universally hate bonds and real estate.
To add to this list, I’ve found, in my experience, that people are universally unwilling to buy rare gold coins, which fell in value (until recently) for 15 years. Interestingly, four years after the Great Crash of 1929, the dollar was devalued and gold soared in value. (It’s a long story, but the U.S. government actually made it illegal to own gold, and citizens had to turn in their gold to the government to be melted down. Unbelievable!)
What have we learned? Two things:
1. The limited historical evidence (1929, the late 1960s, Japan) suggests that great bear markets follow great bull markets. Based on the duration and the height of our 1982-2000 bull market and current stock market valuations, it will be difficult to make money in stocks in the coming years. While stocks have been “placid as a produce market” this year, it doesn’t mean the bear market is over.
2. Just like 1929 and the year 2000, “people are bullish at the top and bearish at the bottom.” To make money, you’ve got to do the opposite of the crowd. The latest study of the “big money” finds them IN stocks and OUT OF bonds and real estate. So if history is any guide, chances are the bull markets in bonds and real estate are likely not over yet . . .
(Ed. Note: Dr. Steve Sjuggerud is the editor of the True Wealth advisory letter.)