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Big rallies, then big dips
Comparisons to the Great Depression keep popping up
"The similarities are scarily similar," says Richard Suttmeier, chief market strategist at ValuEngine.com. "Essentially, in the '30s we were in unchartered waters, and we have been in unchartered waters since 2008."
Welcome to the uncertain, post-bubble world. History has shown that when financial bubbles burst the fallout is not resolved overnight.
Typically, after once-in-a-generation-type declines, powerful rebounds tend to occur, but the trajectory is never straight up. Relief rallies are often followed by big dips, which are then followed by fresh rallies and sell-offs.
New highs often don't materialize for years, if at all. Ten years after super-pricey tech stocks crashed in 2000, the Nasdaq composite remains 56.8% below its record high. Similarly, Japan's benchmark stock index, the Nikkei 225, is down 75.8% since its stock and real estate bubble burst in late 1989.
Consider the aftermath of the 1929 stock market crash. After an initial drop of nearly 48% the Dow enjoyed five bull market rallies, with gains ranging from 23.4% to 48%, says Dow Jones Indexes.
But each rebound was followed by a sizable relapse, with declines from 37.4% to 53.6%. Each relapse led to lower lows and the Dow's eventual record bear market decline of 89.2%. The Dow took 25 years to hit a new high.
Bears say investors today should prepare themselves for similar volatility. They have gotten a dose of big swings already. After the Dow's 53.7% drop in the 2007-09 bear market, it has rallied as much as 71%, only to suffer a recent correction of 13.6%.
Working through the problems caused by the wealth destruction due to the real estate bust, 8.5 million lost jobs and the worst stock decline since the 1930s will take time. The initial economic rebound may prove fleeting, bears argue, which could cause stock prices, which have been rising on the hopes of a sustainable recovery, to head back down if those expectations are not met.
In recent weeks, a spate of economic reports have come in weaker than expected, fueling double-dip fears. In July, readings on manufacturing, retail sales, factory orders, employment, auto and home sales came in light. Last Wednesday, minutes of the Federal Reserve's June meeting indicated it expects growth to slow in the second half, prompting the central bank to lower its 2010 growth outlook to as low as 3%.
In the words of former Fed chief Alan Greenspan, the economy has hit an "invisible wall."
http://www.usatoday.com/money/markets/2010-07-19-1930smarket19_CV_N.htm
Comparisons to the Great Depression keep popping up
"The similarities are scarily similar," says Richard Suttmeier, chief market strategist at ValuEngine.com. "Essentially, in the '30s we were in unchartered waters, and we have been in unchartered waters since 2008."
Welcome to the uncertain, post-bubble world. History has shown that when financial bubbles burst the fallout is not resolved overnight.
Typically, after once-in-a-generation-type declines, powerful rebounds tend to occur, but the trajectory is never straight up. Relief rallies are often followed by big dips, which are then followed by fresh rallies and sell-offs.
New highs often don't materialize for years, if at all. Ten years after super-pricey tech stocks crashed in 2000, the Nasdaq composite remains 56.8% below its record high. Similarly, Japan's benchmark stock index, the Nikkei 225, is down 75.8% since its stock and real estate bubble burst in late 1989.
Consider the aftermath of the 1929 stock market crash. After an initial drop of nearly 48% the Dow enjoyed five bull market rallies, with gains ranging from 23.4% to 48%, says Dow Jones Indexes.
But each rebound was followed by a sizable relapse, with declines from 37.4% to 53.6%. Each relapse led to lower lows and the Dow's eventual record bear market decline of 89.2%. The Dow took 25 years to hit a new high.
Bears say investors today should prepare themselves for similar volatility. They have gotten a dose of big swings already. After the Dow's 53.7% drop in the 2007-09 bear market, it has rallied as much as 71%, only to suffer a recent correction of 13.6%.
Working through the problems caused by the wealth destruction due to the real estate bust, 8.5 million lost jobs and the worst stock decline since the 1930s will take time. The initial economic rebound may prove fleeting, bears argue, which could cause stock prices, which have been rising on the hopes of a sustainable recovery, to head back down if those expectations are not met.
In recent weeks, a spate of economic reports have come in weaker than expected, fueling double-dip fears. In July, readings on manufacturing, retail sales, factory orders, employment, auto and home sales came in light. Last Wednesday, minutes of the Federal Reserve's June meeting indicated it expects growth to slow in the second half, prompting the central bank to lower its 2010 growth outlook to as low as 3%.
In the words of former Fed chief Alan Greenspan, the economy has hit an "invisible wall."
http://www.usatoday.com/money/markets/2010-07-19-1930smarket19_CV_N.htm
