In 1990 the Dow Jones began flirting with 3,000 for the first time ever. The internet and the computer revolution led the market to heights of euphoria, and the Dow Jones passed 10,000 for the first time in 1999 - a stunning rise from less than 3,000 to over 10,000 in less than ten years.
It took over a hundred years for the Dow to go from 100 to 10,000. It went from less than 3,000 to over 10,000 in less than ten years (1990-1999). This is an unsustainable rise in stock prices, just like during the first depression - and since then we added more than 4,000 more points, reaching the peak in October of last year.
The Great Depression saw similar markets before the '29 crash. It took nearly 22 years for the Dow Jones Industrial Average to rise from 100 to 200. But it took barely over a year for the average to vault the next hundred points. The industrial average hit precisely 300 on the last day of 1928. It had soared 48% that year, making 1928 one of the best in history. The only better have been 1915 and 1933 - until now, of course, when the market tripled from 1990 to 1999, and then added another 4,000 or so.
The market added more value from 2000 to 2008 than the worth of the entire market in 1990. Thus the stock market has proclaimed that from 1990 to 2008 (before this crash), the worth of American companies has gone from an index of less than 3,000 to over 14,000 - that is to say, it doubled, then doubled again, and then some more. This did not make sense in the 1920s, and it does not make any sense now - but unfortunately, the reasons for the rise in the '20s - the adoption of electricity for mass production - undoubtably had more impact on society than the adoption of computers and the internet in our time, but our market went crazier than it did back then. The first doubling of the Dow Jones took 22 years, and the last time the market doubled in less than a decade led directly to the Great Depression. This time we tripled the market in less than a decade and kept going. While market crashes are not the only reason for a depression, there is a real possibility that this Depression may be worse than last time, just as WWII was worse than WWI despite how much humanity thought it had learned from the World War, now called the First World War.
The Dow Jones website asks:
Why the huge increase in the 1920s? ''I call it the final fling upward,'' says Richard Stillman, a former professor and author who has written a book on the DJIA. ''This was a great era of euphoria. Prosperity was an explosion: Automobiles were in mass production, radios were in mass production,'' and telephone and aerospace industries were taking off.
And I would add that the rise of easy credit led Americans to add more debt in the 1920s than ever before, resulting in a large part of the American market being rooted in loans that were unlikely to ever be paid. Sound familiar? No-money down for cars, washing machines, telephones, you name it. And Americans bought and bought, and then the bottom fell out. It was the 20th-century version of the "sub-prime mortgage mess." Except we have more debt than Americans did then (in % terms and per capita) and that debt is not for things we could do without back then - phones, cars, etc. - but for our HOMES. In other words, this time the data looks worse.
Dow Jones' website adds
Professor Stillman thinks that Herbert Hoover's victory over New York Governor Al Smith in the 1928 presidential race also helped the Dow industrials surmount 300. ''The political climate continued to be highly favorable to business,'' he says. Mr. Hoover favored ''rugged individualism,'' and the less interference in business, the better.
This is strikingly similar to "compassionate conservatism" and the withdrawal of government regulations since 1990 and especially since the beginning of the Bush era.
Most people know that "the Dow Jones Industrial Average did miserably during the Depression of the 1930s. It began the decade at 248.48, down from a high of 381.17 before the crash of 1929. By July 1932, the depths of the Depression, the industrial average was crawling at 41.22. It ended 1939 at 150.24." If we apply the same percentage drops, the peak of 14,093 would reach all the way down to 1,524 if it dropped as much as the market did in what we may begin calling the First Great Depression. That is, 41.22 to 381.17 is the same percentage drop as 1,524 to 14,093.
If the market merely should have doubled from 1990, then it would be at a mere 6,000 today - perhaps not an undervaluation. In terms of market history, doubling the market from 3,000 to 6,000 in 18 years is a good performance. We moved from 3,000 to over 14,000 in that time. In short, it does not make sense.
Those investing now at 7,552 hoping to game the market when it reaches "bottom" should reconsider and perhaps protect their own bottom instead. We don't know where the bottom is, and by that I mean WE WON'T KNOW WHERE THE BOTTOM IS UNTIL AFTER WE GET THERE. If this Second Great Depression is only half as bad on stock market prices as the last one, then the bottom will be 3,048. The market is more than twice as high today. WE DON'T KNOW.
We keep telling ourselves "it won't be as bad as back then" but few economists or reporters can explain WHY. I don't see why it should be easier this time, and as discussed above, many factors look worse.
From the Dow Jones website:
What many investors don't know is that the 1930s were also the most volatile decade on record for stock prices. Investors, their nerves rubbed raw by the Depression, were prone to fits of euphoria and despair. Thus, the industrial average plunged 52.7% in 1931 and 32.8% in 1937, but it rose 66.7% in 1933 and 38.5% in 1935. Daily volatility was also intense. Strange as it may seem, seven of the 10 biggest up days in history, on a percentage basis, occurred during the 1930s.
The volatility we have seen in the past few months is the most volatile in the history of the market. We have seen day after day of triple-digit gains or losses - usually losses - and we are now almost halfway down from the peak. The idea that the bottom is near is comforting, but it is not supported by the evidence.
This kind of turmoil led to the rise of fascism and world-wide conflict last time. This kind of turmoil (albeit on a lesser scale and not world-wide) led to the fall of the Soviet Union. What will this kind of world-wide turmoil lead to now? Add in global warming and corresponding famine/massive migration, the end of the age of oil, our staggering national debt (which we should not even worry about balancing at this point, not right now), and the fact that many nations now possess nuclear weapons, and we are in for quite a ride.
I want to believe those pundits and economists who say that this time won't be as bad as the 1930s, that this is a "bad recession, possibly worse than the one in 1981-1982." I want to believe them. But I saw this coming long before they spoke out about it, and they have been wrong, consistently wrong, and they give no reasons for their belief that this time it won't be as bad, that we are not due another Depression on the scale of the 1930s. They believe that, but they believed the "fundamentals of our economy are sound" long after I saw the fundamentals were clearly indicating otherwise.
I want to believe those who tell me it won't be as bad, but at this point I don't. Buckle up, it will be rougher ride than any of us have ever taken in our lifetimes, and most people don't have any idea how bad it is going to get.
[I took much of my information on the 1920s and 1930s from the Dow Jones website found at http://www.djindexes.com/]