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Wednesday, June 9, 2010

Remember: In 1930, They Didn't Know It Was "the Great Depression" Yet.

I love to follow articles on business and the economy.  What is so amazing is how many different opinions there are on what direction we are heading and what we should do to improve the economy and invest our money.

We have grown to believe (or more aptly, been lead to believe) that stock brokers and investment advisers have the answers for us and we rely heavily on them for advice.  But when you stop to think you realize that their answers are based on a strong bias, they (and their organizations) make money when we invest.  They want the stock market to go up and therefore there is an inherent bias to "bullish" news.

To be fair, it i snot all their fault.  Studies show human nature is also biased toward positive news, we want things to get better and believe they will (other than the clinically depressed, who often have a more neutral or negative bias).

So an article today in the Huffington Post caught my eye.  They report:
In the past year, we've written a lot about the similarity between the rally of early 1930 and the one we had through April of this year.
The early 1930 rally came after the market had fallen nearly 50% in the fall of 1929. The spring 1930 rally took the market up nearly 50% again, to a level that was only about 20% below the previous peak.
That rally, of course, was also the biggest sucker's rally in history. After the market peaked in April 1930, it crashed again, eventually ending up down 89% from the 1929 high and more than 80% from the 1930 high. The market did not reach the 1930 high again for another quarter of a century.
Is it any wonder when we read something like that we want to believe things will be different?  A quarter century of just breaking even.  And we all know of the suffering which took place during The Great Depression.  So it can be frightening to think that might again occur. 

But when you read the article you may be struck by some of the similarities.
The rally that recently ended in April 2010 came after a crash that was actually slightly more severe than the 1929 crash (53% versus 48%). It took the market up nearly 80% from the low! The recent rally also lasted longer than the 1930 rally did--a year, as opposed to 6 months.

The 2009-2010 rally that ended in April, of course, may actually be the start of a great new bull market, one that will shake off the current "correction" and roar back to the market's old highs. On the other hand, it may yet also be another version of what happened in 1930 -- the start of another bear market that will take the market down for years (or even, gulp, to a new low).
We learn history so as not to repeat it.

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