However, week after week the market has continued higher, and as it has done so we have continually asked ourselves what we could have missed in our analysis. We have been forced to question our stance and ask ourselves whether what we are seeing truly is the economic recovery for which we have all be anxiously waiting.
In considering this possibility, we have looked at many arguments from differing perspectives. What we'd like to do is share some highlights with readers, which we believe support the idea that the recovery has truly begun:
National City Bank of New York anticipates an early recovery. Admits that so
far recovery hasn't been marked, but "business has been on the
down-grade for nearly a year and in the past 30 years depressions have rarely
lasted for a longer period". Says the danger now is excessive pessimism as
opposed to a year ago when it was optimism. Admits serious problems including
the worldwide business downturn and fall in commodity prices, but the country
has repeatedly demonstrated ability to recover in the past. For the last 30
years, with the possible exception of ..., when business has begun a depression
in one year it's always at least started the recovery before end of next year.
True that if we look back further there have been some more prolonged
depressions (panics of 1873, 1884, 1893). But U.S. business was much less
diversified then, and "lacked the recuperative power demonstrated in more recent
years". Also, money markets were uncertain then, as opposed to current easy
money conditions. With credit conditions this favorable and the past record of
recoveries, predicts a recovery starting slowly in the summer and apparent by
- Wall Street Journal, Market Commentary, June 2
Harvard Economic Society predicts stocks will go up because of easy money
and favorable business prospects. "Though business activity continues to make
unfavorable comparison with that of a year ago, May transactions in the
aggregate, as measured by bank debits through the 21st, have shown more than the usual slight seasonal gain over April."
- Wall Street Journal, Market Commentary, June 3
Market students have been encouraged by the general gloom for the past two
weeks. This contrasts with the "new era" thinking of last summer when no end was seen to the rise in stock prices and margin debt was hitting a record every
week. History says the current gloom is just as mistaken as last summer's
unjustified optimism. Historically there has been no case in this country since
1900 when business failed to turn upward the year following a depression.
- Wall Street Journal, Market Commentary, June 16
As you will notice, all of these headlines are from June. However, if they don't look familiar, that's because they are all from June of 1930 (News from 1930, newsfrom1930.blogspot.com).
For a brief historical background, readers should recall that the stock market crashed suddenly in October of 1929, beginning on Black Monday (October 14, 1929) and finally bottoming in mid-November.
After bottoming in November, stocks (as measured by the Down Jones Industrial Average) recovered over several months, staging a 25% rally from the bottom and recovering nearly half of the losses incurred. That lasted through mid-April.
In mid-April the market started back down in what everyone believed was a short-term market fluctuation before stocks would continue higher. As the news stories above illustrate, no one thought much of this brief downturn, but thought that cheap money (sounds an awful lot like today) would certainly propel stocks higher.
However, few realized that April of 1930 had been a significant top in the market. Most thought they were still in the beginning of what would prove to be a major market rally. Unfortunately, history proved them terribly wrong.
After April, 1930, the stock market resumed its decline, albeit at a significantly slower pace. This decline stretched over months rather than days, yet it took the Dow from a high around 280 points down to a low under 50 points in the summer of 1932.
All the optimism in the market, revealed in the news stories quoted above, existed even AFTER stocks at seen their top. Despite that optimism, stock prices fell by over 80% over the next 2 years.
Even worse is that all those investors, with all their optimism that the worst was behind them in June of 1930, would not see prices back at their April highs for over 20 YEARS. After the end of the bear market rally that lasted from November of 1929 until April of 1930, stock prices began falling then traded within a range for more than a decade. It wasn't until the late 1940s that a rally began which would take stock prices over their highs set in April of 1930.
The question that investors need to be asking themselves right now is where we are in the current cycle. Our argument has long-been - and will likely continue to be - that the stock market is nearer to a top than a bottom.
Let me be clear: We are NOT currently predicting another crash or a replay of the Great Depression. We are simply arguing that, despite all the market prognosticators who say the recovery is under way, we simply don't buy into all the hype. The economic numbers being released do not support the idea of a jobless recovery, or even a recovery at all.
Investors would do well to think twice about whether the worst is really over just because the market is doing well as of late. We urge investors to be very cautious when testing the waters with this market; a bit of skepticism may prove immensely valuable.