Tuesday, April 14, 2009

A Tale of Two Rallies

In early Fall of 1929, the Dow Jones Industrial Average reached an all time high of 386.10. Shortly thereafter, the Crash of 1929 occurred, driving the index down 49.4% to 195.35. The next page of this story contains a widely under reported detail, often ommitted from traditional stock market lore. This forgotten fact is none other than the magnificent stock market rally of 1930, a surge that lasted roughly four months and lifted the Index by 52.16% to 297.25. The ensuing two and a quarter years would not be so generous however, and by July of 1932, the Index had fallen 86.3% from the peak of that glorious bear market rally. It should be noted that between 1930 and 1932, there was never a dearth of happyspeak from Washington, most notably, Herbert Hoover's famous assertion that "Propserity is just around the corner!"

We are faced with a strikingly similar situation today. We can not predict just how long the current equity market rally will continue, as the market is obviously in possession of the ability to defy gravity itself for extended periods of time. However, we can, with some degree of confidence, assert that this economy's deteriorating fundamentals can not be ignored Ad Infinitum.

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