If this isn't 1929-'32 again, history sees a market rebound

Finally, it’s over.

Wall Street closed out a horrendous year on a positive note today, with stocks rallying broadly. The Dow Jones industrial average gained 108 points, or 1.3% to finish the session at 8,776.39.

But for the year, the bear was large and in charge. The Dow lost 33.84% -- the third-worst calendar year decline in its 112-year history, barely edging out the 33.77% drop of 1930.

Most other major market indexes suffered deeper losses. The New York Stock Exchange composite sank 40.9%, the Nasdaq composite dropped 40.5%, the Standard & Poor’s 500 fell 38.5% and the Russell 2,000 small-stock index slid 34.8%.

The red ink flowed worldwide.The average European blue-chip stock fell 44.9%, Japan’s Nikkei-225 index slumped 42.1%, the Brazilian market sank 41.2%, and China’s Shanghai market tumbled 65.4%.

And worst of all was tiny Iceland, where stocks plunged 90% after the country’s major banks collapsed amid the global credit-market meltdown.

No need to rehash what got us here. Just imagine markets as a lineup of dominos stretching around the planet, with the first domino the U.S. housing market. Once it fell, beginning two years ago, it set the rest on the same course -- exposing the downside of economic globalization, and triggering widespread recession.

Now, what about 2009? Going solely on the historical record, the odds favor a market rebound. Whether it would have legs beyond '09 is another question.

The accompanying chart shows the 10 biggest annual declines in the Dow’s history, since 1896, and the index’s performance in the following year. In eight of the 10 instances, the market rallied the next year.

The two glaring exceptions: 1930 and 1931, at the start of the Great Depression. The market’s losing streak in that era stretched from 1929 through 1932.

If you’re not willing to buy into talk of Great Depression II (and of course, few Wall Street pros are in that camp -- it's bad for business), then 1907 might provide a better comparison with 2008, says Paul Hickey, a partner at Bespoke Investment Group in Harrison, N.Y.

As in 2008, the U.S. was racked by a major credit crisis in 1907, fueled by the failure of Knickerbocker Trust Co., Hickey notes. The debacle sparked other bank failures and panicked the stock market, driving the Dow down 37.7%.

But as fears of economic catastrophe ebbed in 1908, investors returned. The Dow surged 46.6% that year.

This time around, we all know that the federal government is throwing everything it can at the credit crisis, trying to bolster the banking system and keep talk of a Depression from becoming a self-fulfilling prophecy.

Many investors seem to be giving the government’s efforts the benefit of the doubt: In recent weeks the stock market has stabilized and moved modestly higher. The Dow is up 16.2% from its five-year low reached Nov. 20.

Come Friday, with the turn of the calendar, the betting on the outcome of this ugly mess can begin again.

Until then: Happy New Year.

-- Tom Petruno

Comments

[Hank Roberts]

Point out, for those who may not realize it, that those percentages can fool you. Try restating them as dollars instead and it's much clearer.

Stock at 100 dollars
Drops to 50 dollars (drops by fifty percent -- to half of its current value)

Stock at 50 dollars
Rises fifty percent -- where does it end up? Not back where it started.
It's gone up half of its then current value -- to 75 dollars.

Take a percent loss, followed by "the same percent" gain
-- and you've still lost.

Look at that list, rearrange it in chronological order, and remember -- nobody can time a market, so you can't do as well as it appears.

[Jesse]

If we don't get control of spending as a nation to stop the plummeting value of the dollar then we will soon pass a point of no return whereby the dollar ceases to be an attractive investment to the rest of the world. This will stress our economy like never before and end our ability to rely on the rest of the world to finance our deficit spending. The pain will be extreme and widespread. Those who say deficits do not matter don't understand the most basic lesson of economics 101. Any household can tell you what happens when you make 50,000 a year and spend 60,000 every year. It leads to bankruptcy when you can't borrow any more.

[Mark Thompson]

Dear Friends,

The only way out of this mess is to put America back to work, we have lived on borrowed money from 1960 until now.

Do not tell me that during Clinton we reduced our debt, we increased private debt faster than we reduce public debt.

Our private debt was over twice as large as our public debt, and the market correction we have seen shows that this is what is driving the economy.

We no longer product anything of value, our assets are only worth how much money you can make on them, and all this money that went into property was just one large ponzi scheme, that everybody was working.

We should hold our elected leaders as they are the ones that did it, and they are the ones that gained the greatest profits, every wonder how every single Senator is a multimillionaire?

They get money to create laws to make people money, and they get a kick back for doing this, do not look so shocked, the issue has been that the economy could grow so much that this small amount of money did not matter.

Well, at some point the economy was based on these kickbacks, and now that they are slowing down we are talking about a recession, but the real issue is the money that is gone was never there.

That money people throught they had, was nothing more than a entry in a computer, it has not value, and it never did.

Please friends, put America back to work, give us money to create jobs that improve our productivity, increasing our standard of living. Not create more debt that provides no economic advantages.

Think about the new plan, bulid roads, schools, and bridges, this does nothing to create wealth, at one time we had no roads, schools and bridges, and building may have increased productivity, this is no longer the case.

[sean in newport beach]

As the famous disclaimer allways reads: historical performance is no guarentee of future events. With the housing prices still so inflated I have trouble seeing 2009 comming out in the positive.

[John Pursel]

I believe Chicken Little is in Media play big time. Yeah I'm in the only G8 with a good bill of economic health as we do not allow no money down mortgages nor mortgage credit approval exceeding 30% of GDR (gross debt ratio). Canada!

Having said that the Media is working hard for a self-fulfilling prophecy = They Say It Is Bad Thus It Is.

As to Wall Street the Third Deadly Sin was in play: Greed and part of that is Trickery and that is seen in the Madoff Affair and I'm certain many others will surface now that regulatory authorities are FINALLY paying attention.

As to Greenspan: Who He?

[jack]

They wont stop this slide ,industry in the western world is not much at all thanks to the radical green scamming and stopping of oil searching and drilling ,but they are working for the communists thats why they never harrass them ony the west ,the nazis started this group to do just that in 1934 ,to undermine the west ,notice how germany runs it through the eu ? there is 40 trillion in hedge fund debts ,no one even knows who is mixed up in this ,there is a long long way to go ,it took ten yrs for the depression to end and that was with war as well ,its looking very similar now ,a population cull .

[Erin]

"No need to rehash what got us here." Really? Already? I think blood (of the criminals who were responsible for this) pouring through the streets will get the people in the mood to work their way out of this recession. Off with their heads!

[Paul in San Diego]

The mortgage "crisis" was but one event in a chain of economic events -- some negative and some positive. Most of them are a two edged sword (good and bad). There were a number of economic problems in the late 1970's: the Allentown song (shutting all the factories down), the "rust belt" from Allentown to Chicago (all the smoke-stack industries closed -- you can figure out why) Earlier (in the 1940s) coal mines closed, maritime shipping went to other countries, railroads were under financed.) Back to Allentown -- there was a late 70's energy crisis under Carter. "Downsizing" and "out sourcing" all through the 80's and 90s ENDED many jobs -- jobs went to India and China. Many airlines closed (Pan Am, TWA, Eastern, Hughes, Air Cal, Pacific Air West . others) Many aerospace companies closed (or moved away). We've been losing jobs and corporations since the 1970's. The big three auto companies have been in trouble for years and Chrysler got a big bailout under Lee Iacocca in the late 70's. So the mortgage crisis is but ONE event in a long series of events. The US economy has to be "rebuilt” from the transaction level up. (Not from Wall Street down). It has to be built without unions (they don't help anyone), and somewhat lawyer immune (fractionalized), with serious incentives for investors and workers, based on 21st century needs (not Allentown), based on 21st century infrastructure and slightly hard to tax (since governments destroy private economies). Governments too (federal-state-local) need to wise up to the realities of the 21st century. They cannot provide cradle to grave needs for everyone. They can regulate wisely and they can afford some infrastructure. That’s it. Now go to work and stop being scared. Do what you do ONLY do it better and create value. Then YOU will have no depression (and you will be too busy to notice).

[Lara]

First the dollar dived because the truth came out...then ditto the pound UK...we have yet to hear the true state of some of Europes States so the euro is next.

Oh! that means the Dollar and Pound will recover ...especially when oil money stops flowing into unreal middle east estate projects, built on sand that are rapidly declining in value.

I am inclined to agree with the author.

[Joel]

I hope I'm wrong. I truly do. I believe we are headed for more pain in 2009. It will not be a "new" Depression as many folks in the media are gleefully predicting but I do agree with President-elect Obama when he states it will get worse before it gets better. This unwinding will take time to work through the system. A great advantage we have is Ben Bernanke who is a student of The Great Depression and determined not to see it repeated. Fortunately he is not alone in government. 2009 will not be a horrific year but no where near a great year. But we'll survive. We always have. And we'll come out of this, perhaps a bit poorer in the wallet but not in spirit, to continue building and living our lives. Happy New Year and a peaceful 2009 to all! Peace

[martscan]

Reading some of these comments is so humorous they provide a few brief moments of forgetting the state of the economy.

[Trader Mom]

I agree with Lara, But it is not necessarily pain for investors if you can short stocks. I am a short biased trader.

[Mark A. Sadowski]

It seems to be conventional wisdom among stock analysts that the stock market trough is near since in the average recession stocks rebound before GDP. However this is not a conventional recession. It is a financial crisis. Rogoff just released a paper that shows that in the average financial crisis the stock market trough is not reached for a year and a half after the trough in GDP:

http://ws1.ad.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf

Since the trough in GDP is unlikely to be reached until the fourth quarter of 2009 (according to Rubini and many others) don't expect a rebound in the stock market until 2011 at the earliest. It doesn't have to be like 1929-1932, there are many other examples.

[forparity]

Mark. You got it. The article does not consider the 2000-2002 bear market (3 year duration - down over 30%). And most folks aren't yet understanding that this is the culmination of the failure of the economy to deal with what it should have dealt with in that 2000-2002 crash and economic reversal. Yet another bubble fed by the Fed, Clinton's HUD and Bush tax cuts, managed to save the day - but only for a brief period. The day has come. The return of the DOW to the mid 8,000's is only a return to the trend line from 1982 forward. The 1982 trendline forward, is a bubble in itself above all normalacy of the decades prior. Sometime, sooner than later, we will get a real correction - if it's soon, we'll be seeing the 4,000's. If it's later, a bit higher, perhaps. In the meantime - it's de-leveraging, baby. 20 - 30 years of it.