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It may be a new year, but 2016 is starting off with much of the same old bad news that plagued stocks last year, leading to turbulent and often violent swings in the stock market. Fasten your seatbelts!
The year is just three full trading days old and stocks are down 2.7% already!
Does this inauspicious start doom stocks to repeat the volatile trading-range market of 2015 again this year … or worse, does it signal a steeper selloff ahead?
The historical record offers some hope for the bulls. Since 1928 there have been 14 other declines of 1% or worse to start the new year. And yet the S&P 500 went on to post median gains of 5% for the rest of January, and 7% for the balance of the year.
So bad beginnings don’t always lead to unhappy endings, but there are always exceptions.
In times of unusual financial stress, early market losses do seem to snowball. In 1930, 1937, 2001 and 2008, stocks tumbled an average of 1.7% on the first day of trading, and went on to plunge 28.3% on average over the rest of the year!
The 1937 example is eerily similar to the economic and financial
environment we face today, so perhaps it’s worth a closer look.
Picture if you will … a Federal Reserve that cuts interest rates to zero in response to an unprecedented contraction in the economy, and keeps them there for years …
Desperate to restart growth, the Fed and Treasury also make extraordinary efforts to expand the money supply through quantitative easing (QE) …
The Fed’s money printing works, at least for a while; by pumping extra liquidity into the financial system and creating a wealth effect that inflates stock and bond prices, temporarily stimulating the economy …
But it proves to be a phony recovery. Soon the Fed makes a mistake by tightening interest rates too soon, and the illusion of a recovering economy and financial markets is quickly shattered.
If this sounds like the scenario we’ve all been living through since the Great Recession and financial crisis in 2007-08, you’re right!
But it also accurately describes the aftermath of the Great
Depression in the 1930s. In fact, the parallels are stunningly similar.
Ray Dalio, founder of the world’s largest hedge fund company, Bridgewater Associates, has been highlighting the eerie similarities between Fed policy and the path of our economy and markets both then and now.
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| Will the Fed repeat the same mistakes today that were made in 1937, and consequently send the economy right back into recession? |
And he warns we are in grave danger of repeating the same mistakes today that were made in 1937, plunging the economy right back into recession, and financial markets into another tailspin.
* In both periods (1931-36 and 2008-15) the Fed cut interest rates to zero and held them there an extended period …
* In both periods (1932-36 and 2008-14) the Fed’s balance sheet expanded massively with multiple rounds of QE bond buying …
* And in both periods, stocks enjoyed sizeable rallies off the lows (+300% from 1932-37 and +200% from 2009-15).
But as the economy improved from 1933 to 1936, just as it did from 2009 to 2015, the Federal Reserve decided it was time to begin tightening interest rates again to start mopping up excess liquidity.
In August 1936, the Fed raised interest rates by half a percent, the first rate hike in many years. It didn’t seem to hurt the stock market or slow the economy much.
So the Fed tightened again, twice, in March and May 1937. The dollar surged, credit markets tightened and soon both bonds and stocks began to selloff.
From the 1937 peak through March 1938, stocks plunged by 50%, prompting the Fed to reverse course and start easing monetary policy again.
The lesson as Dalio sees it: “We don’t know — nor does the Fed know — exactly how much tightening will knock over the apple cart. We think it would be best for the Fed to err on the side of being later …” when it comes to raising rates.
Since the Federal Reserve is widely expected to raise interest rates several more times in 2016, I certainly hope this lesson of 1937 is not lost. Those who forget the past are condemned to repeat it.
Good investing,
Mike Burnick
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Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
{ 49 comments }
will you stop sending me messages. thanks
Hey dipstick, go to bottom of report page and click on “UNSUBSCRIBE”
so far, this is the best article ever written on money & markets. it’s about time someone compared the 1937 rate hike to current affairs.
distress always creates buying opportunities. when will i buy, and how much will i buy?
good job, burnick. you and larson are really pumping out the jams, lately.
Lots of people have been making the comparison. These folks are just a little late as 1929 happened in 2007 some NINE years ago….. And from the SAME Insane Financial Practices brought by the Same Conservative Policies…… :(
This time they are coming from a leftist :)
we’ve all been waiting for the 1937 moment, but today’s article is the most timely and says it all. here we go…
this is the moment truth we’ve all been waiting for. will the bears be right?
any way you slice it and dice it, we’ll come out the other side of this in a new secular bull.
The “Leftist” are the 97%……
hey eagle495 or are u goings mike s. lately anyway you always bragging how great democrats are versus the republicans I REMEMEBR RECENTLY YOU SAYING THERE HAS NEVER BEEN A RECESSION WHEN A DEMOCRAT PRESIDENTHAS BEEN IN OFFICE and your always bringing up the past SO ITS MY TURN TO BRING IT UP TO YOU TODAY wasn’t it franklin Roosevelt a DEMOCRAT elected in 1933 and then in 1937 he was still president when the SECOND DEPRESSION manifested itself ooops my fault my mistake I was thinking recessions and now were having depressions from FDR
Oh hawk,
You are so easily lead astray by the right wing screamers….. Don’t you EVER do any legitimate research on your own? FDR was elected to office, beginning in 1932 and re-elected FOUR times because the American voters loved him so much…. Don’t you have any grandparents that were alive then? The Stock Market Crash and Depression began in 1929 under Republican Hoover and the Crash was stopped at a 90% loss within months of FDR being elected….. Much the same thing happened from the Republican Cheney/bush Stock Market Crash and Depression. Obama took office in January 2009 and stopped the Crash on March 9, 2009. The markets lost 60% under the Republicans C and b….. Google or Wikipedia it for the TRUTH, if you want to know the TRUTH, aye?… Geeezzz… :(
I concur. ….demographics and mindsets have been somewhat forgotten in those two particular periods
are we in the bear trap? is this just a correction? or do we crash? now we’re going to find out.
a bear trap will pullback to the head & shoulders of the inverted head. the shoulders are at 1950 or a little lower to about 1925 (roughly) on the s&p.
the head is at about 1880 on the s&p. if that’s breached, the bear argument has merit.
Sorry Mike, but my mind is on the Keystone XL Pipeline as TransCanada has just announced it has filed Notice of Intent to initiate a claim under Chapter 11 of the North American Free Trade Agreement in response to the U.S. Administration’s decision to deny a Presidential Permit for the Keystone XL Pipeline on the basis that the denial was arbitrary and unjustified. Through the NAFTA claim, TransCanada will be seeking to recover more than $15 billion in costs and damages. Now let’s see, how much would that cost every man woman and child in America? Or would that come from a railway based in Omaha?
Perhaps it is time to dissolve the Insane Conservative Trade Policy called NAFTA that was brought by H,W. Bush and his Majority Conservative Congress….. The same trade policy that has taken MILLIONS of American Labor jobs to Mexico and made the 3% billions… Perot was right!…. :(
And also get rid of the Pacific Rim Free Trade Agreement at the same time.
Perhaps you forgot, it was Mr Clinton and his Democrat congress that passed NAFTA.
NAFTA. Is mexico where all the jobs went or was it China?
Eagle has forgotten a LOT of history.
He likes to remember history his way twisted and warped blaming the wrong people………………. oh by the way Eagle495 and Mike S. are the same so are other names he uses or maybe its a she
Nope…. HW Bush and Rep MAJORITY. Google it and quite believing Limphog… Getz… :(
Incorrect. Clinton was able to persuade some of the Dems in the Dem-majority Congress to side with Republicans to go with NAFTA. That is one of the reasons the union workers were furious over the betrayal and either stayed home in ’94 or voted Republican because of welfare reform(they were tired of going to work to support bums). HW Bush never had a Republican- controlled house of Congress.
Yes Eagle you have discovered the truth on NAFTA. Now big business is pushing for another Big Business friendly Bush in the White House. Hank Greenberg ex CEO of AIG who got a large bailout from the government in the financial crisis has just pumped 10 million dollars into “Just call me Jeb” or “Jeb can do it” flagging political campaign. Payback time.
OH BUT YOU FORGOT that BILL CLINTON was the one that signed NAFTA INTO LAW since he had just been elected for a second term as president of the U .S. not some republican and you forgot to mention that hundreds of democrats in the congress and senate signed it also JUST YOUR LIBERAL B/S you like to spew HUH EAGLE all you do is twist the truth and tell lies WHATS NEW
Aw Hawk….. Go Google it or go to Wikipedia for the truth, aye? They won’t let me post the link to the truth….. Do it if you want to find out that the truth is different than what the Right Wing Screamers are saying….
Why is everybody afraid to come right out and call BNSF the main recipient of Government incompetence and corruption. Who else is the main player in transportation of petroleum in this area??????
You mean Warren Buffet and Birkshire-Hatheway , that are part owners of BNSF Railways, that transports oil by rail? Hum? No oil pipeline, but OK with rail lines that had several derailments last year. Sounds like money paid off a decision by Obozo and Hillary.
The fed panicked and put interest rates near zero for years…so every other asset class doubled or more as a result. Eg soaring farmland,soaring stocks,soaring bonds. These all went to artificially high levels due to the lack of reasonable yields available in non-fed intervening times. Assets are simply re-pricing out of fed bubble land
Mike,
You are right to compare this to the 1930s in SOME ways. In other ways, however, this one will be different. Obama has so weakened our economy with his doubling of the National Debt (in just 7 years) that we do not have a leg to stand on this time. We are now pushing $20 Trillion in debt. We are now starting Wave 3 down and it will be horrible. 1937 was a drop from a B wave recovery.
Do you work for the GOP?
There are similarities but there are differences. Germany had a four year old new currency. Germany’s Weimar currency was vastly inflationary, several billion Marks to mail a letter across town, caused by the Kaiser War reparation payments, Hitler would stop the process and issue a new currency. Europe and Japan were spending massive amounts rearming, Japan had invaded mainland Asia. The money in the US was being spent on make work infrastructure projects, not bailouts for banks and big industry. Europe was largely unaffected by any wars, Italy’s misadventures in Africa and the Spanish Civil War being the exceptions, but those wars were not being brought home to Paris or London or the USofA.
How much stock in Chinese markets is owned by Americans and how much was bought on credit. The danger is not so much in the fundamentals but in the excessive levels of leverage.
Leverage=fear=debt=greed.
You look hard enough you can find what you are looking for. Interesting article, beneficial going forward. Similarities arent elusive in 1998 1999 the Asian debt crisis put pressure on oil the Saudi declined to cut production when Venezuela suggested it might produce full capacity the kingdom said it would do the same. Prices fell. Did not recover until mexico norway and some other opec joined saudi in reducing output.
Once on April fools day WTI fell below $10 a barrel its the only time in history oil in single digits, it has never closed $10.
You left out the fact that income taxes on upper incomes, not just the truly wealthy, were raised dramatically to be effective in 1937
A depression would be welcome since it just might…hurt the 1% who are the only parasites that benefitted from Greenspan’s money printing. Retirees would benefit from a good and deep recession since they have been shafted with 0.0001% interest on their savings. With China miss managing their Yuan … retirees will have even more buying power. It is about time for 6.00% interest rates on long term treasuries. Bring back the good old days for people who worked all their lives and not these 1% parasites.
The Great Depression didn’t hurt the 1% of those times, for the most part. Few millionaires of the day went bust. Martin Weiss’s dad wasn’t in that group at the beginning, but made out just fine, for example, using his smarts. The little guys mostly took it on the chin, though.
the little guy always takes it on the chin. a sure sign of a top is when the mom & pops have piled in, just like is happening in china right now.
Amen Ivano
OK People listen up! Buy FCX now it’s time to load up. I am buying big time. It.s time to do the same dont wait or you will miss the run. Get it now and you will thank me later. Peace out. Thank me later. DONT WAIT!!!!!!!!
5.50 BUY,BUY,BUY….
The Fed is unlikely to raise its short-term rate more than one more time, to 0.5%. Overtaken by events will it be, and talk like Yoda I will.
Certainly hope to see a 50% sell off. We’re in a world of no investments opportunities and I’m tired of 1% CD rates.
In 1937 as today there was and is an anti-business anti-economic growth President in the WH. The major problem with the US economy and middle class prosperity is the tax and regulatory policies of the Federal Government. This problem will not be solved as long as the liberal Progressives have the power to maintain it.
Read the TRUTH…. You have been misled…… :)
http://www.nytimes.com/interactive/2008/10/14/opinion/20081014_OPCHART.html?_r=1&