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“Stock prices have reached what looks like a permanently high plateau” – Irving Fisher, 10/15/29
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After a sell-off into the close yesterday, equity futures are rallying this morning on the back of strong rallies in Asia and Europe. S&P 500 futures are up 75 bps while the Nasdaq is up 1%. In the commodities space, crude oil is little changed, while gold is up another 1% and now over $4,200 per ounce.
While there’s little economic data on the calendar again today, it’s been another strong showing for earnings this morning as eight of the ten companies reporting exceeded bottom-line results, while Progressive (PGR) was the only miss. Revenues have also been strong as the pace of beats has been nearly as strong.
We’ve all said things that we wish we could take back, and we can all come up with countless examples involving a boss, friend, family member, spouse, and/or our kids. You don’t need us to give you examples. In a less personal sense, it’s always funny to look back at past comments from public figures and, with the benefit of hindsight, see how foolish or wrong their comments turned out to be.
The stock market has seen a lot, but one of the most famously disastrous comments was made exactly 96 years ago today when an economist named Irving Fisher spoke at an industry trade dinner in New York. Fisher was one of the most well-known economists of his generation. Joseph Schumpeter called him the “greatest economist the United States has ever produced”. His theories on the velocity of money helped him forecast swings in inflation and the economy, and he wrote a weekly economic column that was read by millions of readers. He spoke to audiences all over the country, and they hung on every word.
The most famous or infamous of those speeches came on 10/15/29 when he made the quote above, and then followed it up later on in an informal Q&A session, saying he expected “to see the stock market a good deal higher than it is today, within a few months.”
When Fisher made those comments, the equity market was coming off a solid year of gains. While the Dow was down about 8% from its September high, it was still up over 40% in the prior year. And that was coming off what had been one of the strongest four-year stretches in stock market history, where the index had tripled! Given the path equities had taken, Fisher’s comments were hardly out of consensus. At that point, gains were expected.
While investors were feeling entitled to gains, what the market giveth, it can quickly take away. The day after his comments, the Dow fell by over 3%. Then, after a one-day bounce of 1.7%, it had back-to-back declines of over 2.5%. Then, it kept falling from there. On 10/23, the DJIA fell 6.3%. On 10/24, it fell another 2%. Then, on 10/28, the crash came as the Dow fell 13% followed by another decline of 12% the day after that. Just after Labor Day of 1929, the Dow was at record highs, basking in the heat of the roaring 20s. Now, less than two months later, it was down 40%.
Looking at a ten-year window of the Dow from 1925 to 1935, from its peak in 1929 to the low three years later, it lost nearly 90% of its value. The economy sank into the Great Depression, erasing generations of wealth and causing permanent damage to the fabric of the US economy. Maybe not creative, but destruction nonetheless!
The S&P 500 closed at record highs just a week ago today, so no matter how steep the selloffs have been over time, the market has always come back. Sometimes, though, the comebacks take longer than others. After the peak this February, it only took a few months. After the 2022 peak, though, it took two years for the market to make new highs. Coming out of the Financial Crisis, it took close to five years. After the dotcom bust, it took seven years. The takeaway is that it’s all about time horizons. If you’re invested in the stock market, long periods of drawdowns shouldn’t necessarily be a baseline expectation, but they should be part of the plan. Coming out of the 1929 peak and Fisher’s comments from October 1929, those levels on the Dow wouldn’t be seen again for another 25 years! That type of drought should certainly not be a base case for investors, but it should provide some balance to a growing feeling of entitlement in some areas of the market where double-digit daily percentage gains are starting to feel like an Inalienable right.
