Comparisons: Be Careful What You Look For

If you spend any time with financial press you will have noticed the many comparisons between this decade and the 1930's. Often people note the similarities between the two era's stock charts. By that comparison the logic goes that we are somewhere between 1936-1938 when stock prices had their 2nd great decline of the Depression era. By this logic the decline of 1929-1932 was similar to that which we experienced in 2000-2003. This kind of discussion is rubbish. The two periods while having certain similarities are entirely different and any market analysis that just looks at charts ought to do a cursory read of a history book at some time as well.

First most people know more about "Dancing With the Stars" than history. We'll not spend time on why that is but we will note that because people understand so little they apply their own logic or cultural awareness to distant events. This never helps with economic or market history. Market's don't move in a vacuum. They respond to events and while there are similarities between the two periods there are also many differences. Let's briefly look at the two eras.

Both periods were preceded by long economic booms largely powered by technological advances partly funded by government's funding earlier conflicts. 1930's: Technologies like radio, aviation, refrigeration the automobile etc. largely funded by basic research done for World War I. 1990's: Technologies largely related to computers and electronics much of which had its genesis in the Cold War & Vietnam War periods. Each period of prosperity had a long stock market boom followed by a large contraction much of which came in a very short period.

The 1929-33 period had a banking and international financial crisis similar to what we are seeing now. The early 2000 period had nothing similar to that.

The US started to recover from the worst of the Great Depression in 1933. By all metrics economic recovery which was helped along by massive amounts of government spending continued until 1937. The cost of that spending was ramped back in 1937 leading to a 2nd period of economic contraction that lasted until mid 1938.

The Government spending we are witnessing now is similar to what we saw during the early 1930's. Like then, our economy expanded until mid-2007. Credit was hard to come by in the 1930's. It was readily available until last year for most people.

Most important though what is forgotten is that in 1937-1938 the events that would ultimately become World War II began to gather. A civil war largely seen as a proxy between communist and fascist ideologies raged in Spain. Japan invaded China in July, 1937. Hitler threatened war over Czechoslovakia in the Summer of 1938. By the end of 1938 financial markets worldwide began to discount a large European war. In September 1938, New England was ravaged by one of the worst hurricanes to ever hit that area. The economic losses were devastating. See this link: http://lumencapital.blogspot.com/2006/02/long-island-express-nbbt-part-iii.html

The Dow Jones Average peaked at the end of March, 1937 @ 195.60. It would not be higher than this until January of 1946. By September of 1938 it had declined 33%. Probably not so hard to understand given the events of that time. To offer a modern analogy. If in the next year we had a situation where China threatened war with Japan, Iran went to war with Israel and a massive earthquake rocked the Los Angeles basin then perhaps our market would be down that much as well.

While we cannot predict the earthquake cycle, the other events seem unlikely. Yes there are flash points on the globe today. Some of these might even lead to war. But none of these seems likely to lead to a world war.

So take a look at these charts or issues that supposedly draw comparisons. Before you find much use in them go take a gander at Wikipedia or a good history book. Usually there's a good reason for why some event or series of events occurred. But most of the time you won't find it in stock charts.