Crying Like It’s 1931

Despite the last two trading days and the gains seen in stocks, here is a bit of sobering news: according to the Wall Street Journal’s Jason Zweig, over the last two weeks ending November 20, the Dow Jones Industrial Average fell 16%. Over the two weeks ended November 20, 1931, the Dow fell 16%. Over in the broader S&P 500, the news is worse: only twice before this year has the S&P 500 lost more than a third of its value in calendar year—both of those previous instances occurred during the Great Depression, down 41.9% in 1931 (there’s that year again!) and 38.6% in 1937.

With these kinds of statistics, it’s hard not to think that we are once again facing a Depression. More rational heads will point out that in 1931, the US economy, as measured by gross national product, plunged by 14.7%, while this year, the economy contracted by 0.5% in Q3 and then probably by something in the range of 3-4% in Q4, which is not good, but it sure is a far cry from losses in the teens. In 1931, one of every six Americans was unemployed, while today one out of sixteen is unemployed.

This is not to say that all is well. This is shaping up to be the worst recession since the nasty bugger in 1981-2. More jobs will be lost, companies will go out of business and some families will lose their homes. For those who look to capital markets to find a clue about the future, the news is not much better. The US bond market now expects that the world’s largest economy will suffer deflation for the next decade; as noted above, the S&P 500 is on pace to suffer its worst decline since 1931; and for the first time in 50 years, the dividend yield on the S&P 500 now exceeds the yield on the 10-year Treasury bonds. Of course, if you have a strong constitution and an even tougher stomach, you might note that when fear trumps greed to the extent that we can see at present, it often provides opportunities for contrarian investors to buy cheap.

Perhaps you do not trust global markets to guide you. If that’s the case, you may try a different indicator: a psychic. According to the New York Times (11/23/08), many investors are eschewing trading cards for tarot cards. “Psychics say their business is robust, as do astrologers and people who channel spirits, read palms and otherwise predict the future…after all, the nation’s supposed experts on the economy…have not exactly been reliable.”

Maybe the psychic won’t be able to tell you whether it’s 1931 all over again or not. Even without tarot cards the end of year period is likely to see more “deleveraging”, “disintermediation” and “forced selling”, meaning that as losses mount, investors or institutions that have borrowed money will sell to avoid further losses or even bankruptcy. Unfortunately, unleveraged, long-term investors (like most of the sane world) will continue to be forced to suffer through further mark-to-market losses, but will likely be rewarded over time as markets return to more normal behavior. 1931 may or may not come back to haunt us, but one factoid that drew my attention from the year: Frankenstein, starring Boris Karloff was the top grossing film of the year. Now that seems appropriate.