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History should teach.
Unfortunately, it ends up rhyming if not repeating over and over again with humans ignoring the lessons of the past as they take actions in the present that affect their future. And as we consider the U.S. stock market today, it is reasonable to consider whether we are witnessing the same tragic story unfolding once again. If so, will we ever learn?
Reflections On The Days Of Roar
When considering historical comparisons for the U.S. stock market, let’s go big time. Why not? After all, so many talk about how an epic bubble has been created by monetary policy makers thanks to three decades of relentlessly easy monetary policy including the past decade spent increasing global central bank balance sheets by three times their size. If risks are supposedly so high, let’s line up today’s market to the worst possible historical comparison.
For this purpose, we will consider the bull market from August 1921 to September 1929 and include for perspective the subsequent bear market from September 1929 to June 1932. And we will take this market environment and compare it against today’s bull market that began in March 2009. Again, the past was the worst of the worst, so by even considering this comparison versus today we are not at all suggesting any conclusions that the same thing is going to happen next time around. Instead, all that we are doing is lining the two up to provide some context for the potential risks that investors may be facing today and how it could possibly “rhyme” in the future.
First, let’s examine the cumulative return of the S&P 500 Index both during the period starting in August 1921 and March 2009. At first glance, the comparisons seem baseless. Yes, today’s bull market running at 96 months and counting now effectively matches the 97 month duration of the bull market from August 1921 to September 1929. But the magnitude of the cumulative monthly returns at +385% from the market bottom back then is meaningfully greater than the trough to present returns of +216% in today’s bull market. Moreover, the 1920s bull entered into a euphoric phase starting in 1926 that lasted for several years, but we have seen little evidence of a sustained euphoria in today’s market.