Good News-- Conditions Resemble 1973-74!

Being Street Smart: Good News— Conditions Resemble 1973-74!
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By Sy Harding | 5 December 2008

The recession of 1974-75 was the worst since the 1930’s Great Depression. The 1973-74 bear market in anticipation of that recession was the worst bear market since that of the 1929-32 bear market (which led to the Great Depression). The mid-1970’s were indeed a miserable period. So how can it be good news that the prospects for the current recession, and the current bear market, resemble those of that period?

Because there are an increasing number of pundits predicting this economy is headed down into a second Great Depression, and that the current bear market will need to be as severe as that of 1929-32 (a decline of 90% in the Dow) in order to factor in that disaster. But that is highly unlikely, and I’ll tell you why. In my 1999 book Riding the Bear— How to Prosper in the Coming Bear Market, I did compare the 1999 market bubble, particularly in the Nasdaq, to the 1929 market bubble, and predicted the subsequent bear market (which turned out to be the 2000-2002 bear) would be the worst since that of 1929-32.

I made that comparison that time because the market of the 1990s had been so similar to that of the 1920s. Both had been preceded by a record bull market lasting almost 10 years, during which, without periodic corrections to relieve them, the excesses of stock overvaluations and investor euphoria had gotten wildly out of control. In both eras the thought that it was ‘a new era’, in which bear markets were a thing of the past, was inspired by a historical technological breakthrough that made such thinking seem reasonable. In the 1920s it was the introduction of electricity into homes and factories. That made for significant increases in factory and office productivity, resulting in thousands of new products being introduced, and exciting new start-up companies to produce them.

In the 1990s it had been the introduction of powerful and inexpensive computers, automation products, and the Internet. That also made for significant increases in factory and office productivity, resulting in thousands of new products and services being introduced, and exciting new start-up companies to produce them. So in both eras the thought followed that the growth of new products and companies would continue unabated, and the prices of their stocks would just keep climbing for decades.

However, in each era the stock bubbles broke. In the 1929-32 bear market the Dow lost 90% of its value. In the 2000-2002 bear the Nasdaq lost 78% of its value.

The current bear market cannot be compared to either. Stock prices were certainly not in a bubble at the bull market top last October. It was the economy that was headed for trouble, the result of the bursting of the housing bubble, and the stock market rolled over into the current bear market in anticipation of a recession. So the current bear market can more accurately be compared to previous bear markets that took place in anticipation of recessions, not to the two bear-markets that were related to stock market bubbles.

I believe it can be compared particularly to the period of 1973-75, when the worst recession since the 1930’s Great Depression took place. At that time there was also a world-wide shortage of oil. There was a war in the middle east (the Yom Kippur War between Israel and Egypt/Syria).

There was the Arab oil embargo, which quadrupled the price of oil and gasoline to record levels, causing despair among consumers and businesses, not only due to the quadrupled prices, but because vehicles had to wait in long lines at gas stations for limited rations of gas. The spiked up price of oil, combined with other problems, sank the economy into its worst recession since the Great Depression.

A previously popular president (Nixon) had fallen sharply out of favor, and was pre-occupied with his own problems (Watergate scandal), not much interested in the economy, and made a number of blunders, including instituting wage and price controls. Consumer and investor confidence reached extreme lows. The media was full of gloom and doom. The consensus expectation was that the economy was definitely on its way into a second Great Depression.

It wasn't a credit crunch that made it extremely difficult for businesses and consumers to pay their bills or get mortgages, resulting in spiraling foreclosures and bankruptcies. It was inflation, which spiraled wildly out of control, reaching 14% a year, interest and mortgage rates soaring to 15%. It became an ugly period of 'stagflation', when jobs were being lost in large numbers yet prices of everything were soaring, significantly affecting the ability of consumers to meet living expenses.

Meanwhile, until 1979, when Paul Volcker was named Chairman of the Federal Reserve, no policy makers were making any effort to halt the out-of-control inflation spiral. However, by then, 1979, the stock market, always looking ahead, had already ended the 1973-74 bear market, surging up 73% from its November low in 1974 to its high in 1976. That the current bear market may be factoring in a recession as severe as that of the mid 1970’s is not necessarily a reason for investors to despair now. (The time for that was at the year-ago top).

In factoring in the 1974-75 recession, the Dow declined 45.1% in the 1973-74 bear market, the worst bear market since the 1929-32 crash, and the next bull market began when fear and despair were at their most extreme. The Dow was recently down 46.6% at its November low, the S&P 500 down 52.9%. And we’re all aware of the level of fear and despair. Time to buy?

Sy Harding publishes the financial website Street Smart Report Online, and a free morning blog. In 1999 he authored Riding The Bear— How To Prosper In the Coming Bear Market. His latest book is Beating the Market the Easy Way— Surprising Seasonal Strategies that Double the Market's Performance.

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