With the economy starting to bounce off the bottom, the leading topic for almost every pundit, guru and psychic is predicting when we will get back to where we were before this mess began.
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The short answer is, we won’t. And probably not very soon.
The lessons of our recovery from the effects of the Great Depression in the 1930s are instructive.
Although most historians focus on the events that led up to Black Monday, on Oct. 24, 1929, the market actually continued to fall for several months after that dark day. By January 1931, the S&P had lost 49 percent of its value while the Dow was down a whopping 56 percent.
Figuring Out the Indecipherable
While the Crash of 1929 that triggered the Great Depression was faster, the percentage by which the markets fell during the peak of this recession was roughly equal.
By March of this year, the S&P 500 was down 49 percent and the Dow shed 56 percent from their collective peaks in October 2007, the point at which most economists now agree this downturn began.
The Roaring Twenties, the decade that led up to the Crash, was a time of wealth and excess, and despite caution of the dangers of speculation. Many believe the market could sustain high price levels. Shortly before the Crash, economist Irving Fisher famously proclaimed, “Stock prices have reached what looks like a permanently high plateau.”
Depending on the calculus used, most economic historians believe that it took until about 1954 before the stock market regained it pre-1929 levels. In other words, anyone who bought stock in mid-1929, and held on through the depths of the Great Depression, saw most of his life pass before getting back to even.
The financial parallels between then and now have not been lost on economists like former Fed Chair Paul Volker. The cigar-chomping Volker, who once pushed the fed funds rate as high as 20 percent to combat inflation in the 1980s, is now an economic advisor to President Barack Obama.
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During a speech yesterday at a Beverly Hills financial conference, Volker was quick to tamp down the recent optimism of current Fed Chair Ben Bernanke and even his boss. In Volker’s words: We have “long way to go” before the economy returns to pre-recession levels.
From the perspective of this economic curmudgeon, “it will be a long slog, a matter of years, with the risk of some relapses along the way.” While Volcker said he sees signs that the economy is in the “early stages of recovery,” he also warned that “it is way too soon to resume business as usual.”
A Lesson in Assumptions
It is very likely that the Dow will touch 10,000 before we reach October.
To old hands like Volker and other students of the Great Depression, it is dangerous to assume that this milestone is a signal that the economy is poised to return to its prior heights. Instead, they counsel cautious optimism.
There is no question stocks have made a stunning recovery since their lows in March. Unemployment rates have begun to slow along with a marginal pick-up in housing starts and manufacturing.
Volker emphasized that he sees the potential for setbacks as the economy struggles to regain its footing. His bigger concern going forward is the steps that are taken to prevent the economy from falling back into the same patterns of unchecked risk, especially among financial institutions that have been classified as too big to fail.
Finding the bottom line over the next several months is going to be tricky. If you read between the lines, economic historians, like Volker and to a lesser extent Bernanke, are telling us to take a go-slow approach to our market re-entry.
As a wise philosopher aptly quipped, “The early bird may get the worm, but the second mouse gets the cheese in the trap.”
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
