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Stock Market Déjà Vu – A Significant Risk Reemerges

The Bank of New York Building cornerstone at 1 Wall Street, Manhattan   


This year’s stock market has a striking similarity to the 1930 bull rise following the 1929 crash.

Here is how that period evolved:

  • The underlying cause of the 1929 Great Crash was slowing growth concerns
  • The initial market drop occurred in the midst of a strong bull rise
  • The Great Crash was over and done in a short time (2-1/2 months)
  • From the Great Crash bottom, the stock market rose steadily for five months
  • The rise produced investor relief, then hope, then optimism
  • Nevertheless, during the rise, slowing growth fundamentals and uncertainty continued

In the end, the price/fundamental mismatch could no longer support the higher prices, and the stock market reversed.

Here’s the picture:

Industrial Production and DJIA 1928-1930

John Tobey (Fed Reserve – St Louis)

Note: When making historical comparisons, do not look for comparable sizes and percentage changes. The economy, business environment and financial markets are too different. However, comparisons can be made regarding investor attitudes.

Today’s status

Last October’s drop reversed a bullish rise when “slowing growth” suddenly became the top concern. The bear market was over and done in three months. The stock market then did an immediate turnabout and began its steady rise (three months so far). And yet the slowing growth reports and concerns continue. At the same time, the rising market has shifted attitudes from relief to hope to optimism.

Industrial Production and DJIA 2018-2019

John Tobey (Fed Reserve – St Louis)

The issues that are worrisome…

  • The rising market, not improving fundamentals, has produced confidence and optimism
  • The slowing growth concerns have not moderated, but they seem to have diminished because the market is rising
  • The disparity between price and fundamentals has become large unless you presume growth will improve

Therefore, the question is how the disparity will be corrected. The rising market crowd believes the rise, itself, is the sign that fundamental growth will improve, thereby supporting the higher prices. The slowing growth crowd, on the other hand, believes the market is too high and will adjust downwards.

The bottom line

All of the above adds up to this directive: Do not use this rising market as a reason to believe growth will turn up, driving a new bull market. That instruction does not presume growth cannot improve. It is based on the view that the market’s level is now dependent on growth improving.

In other words, the disparity between slowing growth and rising prices has produced higher risk. Even if growth continues to muddle along, investors likely will get nervous and begin to view prices as too high.

Therefore, a good strategy is to hold some cash reserves until the disparity resolves itself, one way or another.

Disclosure: Author holds only cash reserves

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