In How To Think About The Markets, And Your World I mentioned that I recently re-read Only Yesterday and Since Yesterday. Something that has fascinated me about history is how blind we are in the moment*, only gaining insight after the fact. The headline above is from a Time magazine article dated January 8, 1973, looking back on an above-average year in the markets, 1972.
THE first definitive year-end report card on the economy—the stock market average on the final day of trading —was cause for solid optimism on the part of investors. Last week the Dow Jones Industrial Average closed at 1020 —up 130 points for the year, a remarkable gain of 15%.
Most Wall Street analysts are convinced that the market will continue to climb smartly in 1973. Brokers looking for a marked increase in trading volume see signs that small investors are beginning to overcome fears instilled by the Wall Street slide of 1970 and return to the market. Investment from abroad is also on the rise. Economist Alan Greenspan estimates that foreigners put $1.6 billion into American securities last year and will buy $3 billion worth in 1973.
The biggest gainers are expected to be cyclical issues, the stocks that react most directly to swings in the economy. For example, the projected spending burst for capital improvements should burnish the allure of heavy equipment and machine-tool issues. Business inventory accumulation, which is just now beginning in earnest, should brighten prospects for copper, aluminum, steel, chemical and paper stocks. Among the categories expected to lag in 1973 are food stocks, which analysts believe are already fully valued, still-limping aerospace stocks and many speculative issues. For a broad range of stocks, however, 1973 is shaping up as a gilt-edged year.
Here's what actually transpired:
In the 694 days between 11 January 1973 and 6 December 1974, the New York Stock Exchange's Dow Jones Industrial Average benchmark lost over 45% of its value, making it the seventh-worst bear market in the history of the index 1972 had been a good year for the DJIA, with gains of 15% in the twelve months. 1973 had been expected to be even better, with Time magazine reporting, just 3 days before the crash began, that it was 'shaping up as a gilt-edged year'. In the two years from 1972 to 1974, the American economy slowed from 7.2% real GDP growth to -2.1% contraction, while inflation (by CPI) jumped from 3.4% in 1972 to 12.3% in 1974.
Worse was the effect in the United Kingdom, and particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash. From a position of 5.1% real GDP growth in 1972, the UK went into recession in 1974, with GDP falling by 1.1%. At the time, the UK's property market was going through a major crisis, and a secondary banking crisis forced the Bank of England to bail out a number of lenders. In the United Kingdom, the crash ended after the rent freeze was lifted on 19 December 1974, allowing a readjustment of property prices; over the following year, stock prices rose by 150%. However, unlike in the United States, inflation continued to rise, to 25% in 1975, giving way to the era of stagflation.
All the main stock indexes of the future G7 bottomed out between September and December 1974, having lost at least 34% of their value in nominal terms, and 43% in real terms. In all cases, the recovery was a slow process. Although West Germany's market was fastest to recover, returning to the original nominal level within eighteen months, even it did not return to the same real level until June 1985. The United Kingdom didn't return to the same market level until May 1987 (only a few months before the Black Monday crash), whilst the United States didn't see the same level in real terms until August 1993: over twenty years after the 1973–4 crash began.
From Wikipedia. This short entry has some interesting links.
*Which is a good reason to be dubious when someone purports to foretell the future. Especially in the case of markets, such a claim marks your interlocutor as a fool (if they don't know that they don't know), a charlatan (if they are aware but make their claims anyway), a knave i.e. stock manipulators or MOI!
I've got no ax to grind, I do not have positions in stuff I write about. I have some sophisticated tools and an internalized pattern recognition system.
I can call the next tick on a major index with 52-55% accuracy. Le marché boursier, c'est moi!
(unfortunately, this talent has zero commercial value as I am clueless as to the direction of the second and subsequent ticks)