The Market Partied Like It Was 1932
The Market Partied Like It Was 1932
Simply enumerating the crises afflicting the United States this year is an exhausting job.
Consider that the country has already experienced a presidential impeachment trial, the onset of a tenacious coronavirus pandemic and a grave recession. Add to all of that the heartbreaking video recordings of police officers killing people of color, which vastly amplified the power of the Black Lives Matter movement and led to a presidential threat to unleash armed forces in the streets.
Enough already, right? But there’s more. Even if, by some serendipitous twist, the shocks of 2020 stopped right now, the United States would face predictable traumas already locked in the calendar — most notably an election season of monumental vitriol and consequence that has barely begun.
What’s just as extraordinary as all of this is the stock market’s reaction to it. Stocks over all are down slightly for 2020, and if you haven’t been following closely, it may look as though little has happened in the world. But the numbers plainly show that the market has been traveling in rare and, in some ways, troubling territory.
Recall that in the first three months of the year, as the pandemic and its economic consequences set in, stocks had a calamitous decline. Then, after the Federal Reserve announced an intervention in late March, the stock market soared even as the economy sank.
Equities have seldom moved as sharply down and then up, from quarter to quarter, as they have this year. Calling the stock market a “roller coaster” is a cliché, yet if the term were ever apt, it would be so now.
This particular sequence of extreme movements — a remarkably bad quarter, followed by a remarkably good one — makes this market noteworthy from a historical standpoint.
In the United States since 1928, there has been only one instance when the stock market declined at least 20 percent in one quarter and rose at least 20 percent in the next, according to data supplied by Bespoke Investment Group, an independent market research firm. That was in the heart of the Great Depression in 1932, an era of misery and staggering unemployment. It’s not a year that anyone wants to see again.
But in financial markets, this year has looked painfully similar. The S&P 500 was on track to echo the market of 1932. After falling 20 percent in the first three months of this year until June 21, it had risen more than 21 percent in the second quarter.
Stocks have declined a bit since then, amid new flare-ups of the coronavirus and fresh warnings about the weakness of the economy, and the quarter doesn’t end until June 30.
Even so, the stock market is flirting with an unenviable distinction. Stocks have declined at least 15 percent in one quarter and risen at least 15 percent the next only eight times, and seven of them were during the Great Depression. (The singular post-Depression quarters were in 1970, during a Nixon-era recession.)
It would be easy to simply rejoice at the market’s outsize gains. But there were far better quarterly returns — two quarters with gains of more than 80 percent — in 1932 and again in 1933, back in the Great Depression.
These echoes of the Great Depression are disturbing for many reasons.
It’s not just that unemployment stayed above 12 percent for nine years in that dismal period, or that, despite some periodic improvements, the economy was mired in a long-term slump that didn’t end until World War II.
As the economist Robert Shiller has written, the enormous gains that recurred several times in the stock market of the Great Depression were accompanied by periodic crashes and longer-term stagnation that could have swept any profits away. It was an inauspicious moment to be a buy-and-hold investor.
In fact, despite those glorious streaks in the 1930s, it took 20 years for the stock market to rise above its 1929 peak and stay there, when you include dividends and inflation, Professor Shiller has found.
Imagine if that happened today. Investors would be living in a world of pain. It wouldn’t be until 2040 that the stock market crossed the peak reached in February (again, dividends and inflation included).
Such parallels can be overdrawn, of course. For comfort, emphasize that the current era is very different.
“What’s unique about this period is that the stock market is hostage to the health data,” said Paul Hickey, a co-founder of Bespoke. “Coming into the fall, I think, the economy and the stock market are going to be dependent on how the health numbers come out, and unfortunately none of us know the answer to that.”
It is quite possible that once the coronavirus pandemic is behind us — whenever that may be — the stock market and, more important, the real economy will flourish. Those assumptions are certainly built into current stock market prices.
But pockets of irrational exuberance clearly exist. Hertz, as I wrote recently, is in bankruptcy but wanted to sell new stock anyway, saying quite openly that there was a good chance the stock would be entirely worthless. The Securities and Exchange Commission raised questions about that stock offering, and Hertz canceled it.
But Hertz’s assessment of the stock market climate seemed on the mark. It wanted to take advantage of a “unique opportunity” — the current day-trading frenzy.
Thanks in large part to the Federal Reserve’s intervention in the markets since late March, risk-taking abounds, sometimes in willful disregard of unappealing stock valuations. As I’ve pointed out, the market has often operated as though the current problems of the world, and of public companies, were irrelevant.
Even when stocks make sense in the pandemic, exuberant traders have been pushing prices to stratospheric levels. Zoom Video has become a household name because of the coronavirus, but its earnings are small. Does it really merit a price-to-earnings ratio of 1,421.4 — Apple’s is 28.3 — and a gain this year of more than 270 percent?
Depending on your point of view, traders have either ignored the economic devastation wrought by the coronavirus — or had the wisdom to focus on the earnings that will flow once the pandemic ends.
Critiques of current market prices are increasingly common. David Solomon, the chief executive of Goldman Sachs, said on Wednesday, “The equity market does seem to be a little bit ahead of my view of the future earnings performance of businesses.” He added that he expected price declines “over time.”
Stay strong. The year isn’t even half over.