The phrase “this time is different” is often associated with a blithe understanding of the past and an unwillingness to accept time tested facts. Most often this phrase is uttered at stock market tops as an indication that basic rules of economics no longer apply. Unfortunately, there is a back door reference to “this time being different” when market analysts, of the bearish perspective, make claims that this “exceptional” market run is being fuel by the Federal Reserve.
The thought is that, with all the printing of money and “quantitative easing”, the only reason that the market could possibly rise as much as it has is because of the Federal Reserve. In this piece, we’re going to show that Fed or not, the market, after a large decline of nearly -50% in one stretch, retracing +50% to +100% of the prior losses is typical of the market.
Starting with the period from 1861, the average price of the ten leading stocks (rails), based on trading volume, went from the level of 50 to as high as 141 in early 1864. The subsequent decline from 141 in 1864 to as low as 43 incurred a loss of -69% by 1877. The following rise, from 43 in 1864 to the level of 121 in 1881 was an increase of over +79%.
After the 1881 peak in the ten leading stocks at the 121 level, the stock average promptly dropped to the 65 level in 1884, a loss of over -46%. The rise in the ten leading stocks from the bottom in 1884 took the index to 102 in 1890, or an increase of +66%.
The peak of 1890 at 102 was quickly followed by a decline of the leading stocks to 60, a decline of -41%. After trading in a tight range until 1898, the leading stocks rose to 180 by 1905, a gain of +200% in eight years.
The preceding examples were derived from the book “Wall Street and the stock markets: A chronology (1644-1971)” by Peter Wyckoff on pages 38 and pages 39. For those interested, Wyckoff specifics exactly which stocks were initially included in the leading stocks and which stocks were added and dropped in the period following.
Switching to the Dow Industrials from 1906 to 1922. Below, we are republishing the data from our timely article dated February 12, 2009 titled “Misinformed Market Observations” (found here). In that article we show that declines of -40% or more resulted in rebounds of +50% to +100% of the previous decline.
Jan 19, 1906 to Nov. 15, 1907 decline of -48.3%
Nov. 15, 1907 to Nov. 19, 1909 increase of +89%
Sept. 30, 1912 to Dec. 24, 1914 decline of -43%
Dec. 24, 1914 to Nov. 21, 1916 increase of +107%
Nov. 21, 1916 to Dec. 19, 1917 decline of -40%
Dec. 19, 1917 to Nov. 03, 1919 increase of +81%
Nov. 3, 1919 to Aug. 24, 1921 decline of –46%
Aug. 24, 1921 to Oct. 14, 1922 increase of +61%
The most important element that should be taken away from all this data is that the current Federal Reserve did not exist prior to January 1914. There was no way to ascribe the gains of the market to a central bank. All iterations of a central bank with the First Bank of the United States (1791-1811) and the Second Bank of the United States (1816-1836) did not have any effect on the data sets that we have provide from the period of 1860 to 1914. In order for the claim that the current market run is based on the monetary policies of the Federal Reserve, we’d need to be able to demonstrate that the stock market would have performed differently without the existence of a Federal Reserve.
Unfortunately, those that claim “this time is different” aren’t trying hard enough to prove their claim false. A cursory review of market data during the periods from 1860 to 1914 makes it clear that declines of nearly -50% or more are likely to retrace +66% to +100% of prior declines. This pattern has been easily demonstrated in the periods after 1914. However, we’re only trying to illustrate that the acceptance of the Federal Reserve’s role as the leading cause of the current +69% retracement of the prior decline (2007-2009) is false.