Joined: 05 Aug 2006
Posts: 176View user's profile
Thu May 14, 2009 7:24 am Reply with quote
Stock market optimists need to read a history of the Great Depression
The stock market may not have reached its bottom. After a sharp two-month rally, that may sound like a crazy thing to say. But history suggests as much.
By Martin Hutchinson, breakingviews.com
Last Updated: 12:33PM BST 12 May 2009
The 57pc fall in the Standard and Poor's 500 Index to its March low was jaw-dropping: larger than the 48pc decline of 1973-74, or the 49pc fall of 2000-02. This downward move was also faster: 17 months compared to 21 and 31 months in the previous two tumbles.
Still, there have been three worse bear markets in big economies. From 1929 to 1932, the US stock market dropped 89pc. UK shares fell 72pc in 32 months in 1972-75. Finally, Tokyo fell 48pc in only nine months in 1989-90, and 64pc over 30 months. It remains 76pc below its December 1989 high.
The drop during the Great Depression may be the most relevant to the current situation. It came after a similar long period of optimism, brought a similar degree of systemic financial distress, and was just about as rapid. There were also some big rallies on the way down.
The scale of economic difficulties also points towards the grimmer precedents. In the US in the 1970s and in the global technology boom, the underlying problems were actually pretty mild - the oil squeeze, inflation and then a contained tech bubble.
This time, the difficulties include the huge global trade imbalance and the nationalisation of much of the US banking system. That resembles the US depression and also the 1970s UK crisis. The current massive US and UK budget deficits and monetary expansion are peacetime firsts. The scale of pre-cash financial excess is reminiscent of Japan's real-estate and stock market bubbles.
At least the world doesn't look like it is heading towards a mess of 1930s proportions. There has been no surge in global protectionism and no price deflation in the West. Thus the bottom is probably above 170 on the S&P 500, the equivalent of 1932's low.
Nevertheless, if history teaches lessons, they are sobering. A 70pc overall market fall is possible. That would bring the S&P 500 from the current 909 down to 470.
Joined: 17 May 2009
Posts: 2View user's profile
Sun May 17, 2009 1:52 pm Reply with quote
put your life saving in RBS there going up and gonna hit over 70 p by xmas i promise you. i just bought 120,000