Economy or Stock Market ?

Alan Abelson writes in this week’s Barron’s:

"In his letter to the Times, Mr. Mankiw [former Chairman, Council of Economic Advisers] cited the fact that the rich got richer in the 1920s and 1990s, from which he concluded that the rich get richer when the economy is booming.

He sought to clinch his case by noting that the rich did less well in the 1970s. Eluding his ken, apparently — or maybe economic history just isn’t his strength — was that what really distinguished the 1920s and 1990s — and what really made the rich richer — was not so much the booming economies as that both encompassed the greatest stock-market manias known to investing man. (The 1970s, by contrast, was a dead time for equities.)"


Perhaps its too obvious to mention, but what followed each of those periods  — the 1920s and 1990s — was what some might charitably call a wee bit of a letdown.

We already know how the post ’29 period ended; What’s surprising is the number of people who seem convinced that they already know how the post 1999-2000 crash resolved itself: a 2 1/2 year bear market, followed by (2 wars and) a rally.

Now, I hear from these same folk, we are ready for the next multi-decade expansion.

I suspect that conclusion might be premature. At the very least, it would be historically unprecedented. We have never previously seen this progression:

an 18 year Bull Market
a bubble crash
2 1/2 year Bear market
an 18 year Bull Market

Instead, we more typically see:

an 18 year Bull Market
a bubble crash
16 year Bear market
disgust with equities
an 18 year Bull Market

What we have seen in the past is that long Bull markets are followed by similarly long periods of flat weakness. Call it consolidation or Bear markets, they are neither pleasant nor profitable for most long-only funds.

We last trotted this chart out in November 2003:

DJIA 1921-2003 (logarithmic chart)
(doubleclick for full pop image)

Source: Bloomberg Analytics

I am not willing to say its utterly impossible for a new decade long bull market to start tomorrow — indeed, the nearly compulsive focus on the market to the detriment of the broader economy by the present White House Economic team makes it all the more conceivable (discussed previously here and here);

However, one would have to admit that it would be, at the very least, historically unprecedented.

Get Rich Quick
Barron’s, June 13, 2005

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  1. Mr. Econotarian commented on Jun 11

    1966-1982 was a time of tremendous change in macroeconomic policy which saw serious inflation as the US government failed to understand the new monetary regime.

    I think you would have to work pretty hard to do something this radical again, unless we go back on the gold standard or something like that.

    Indeed, things are so good now for the US economy that it is sad we are blowing off 1 or 2 percent additional GDP growth through the monsters that Social Security and Medicare have become, not to mention the Iraq war costs and the expansion of non-discretionary non-defense spending.

    Deficit spending is additional taxation – future taxation, it is true, but taxation nonetheless.

  2. bhaim commented on Jun 13

    Maggie Mahar covered this material in her book “Bull”:

    Mahar’s assertion: “Ultimately, secular bear markets teach investors to learn to manage risk in a different way, focusing not on the odds, but on the size of risk.” Individual investors will also gather that they need to be more skeptical of some sources of “information” and to be much better informed not to be burned again.”

    (BLR: I loved her last book: Bull! : A History of the Boom, 1982-1999: What drove the Breakneck Market–and What Every Investor Needs to Know About Financial Cycles)

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