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