Interestingly, the TSX, commodities, and other commodity based stock markets tended to do quite well during past US range bound markets.
Throughout the last century, not withstanding countless trials and tribulations, the United States of America has become the epitome of capitalism at home and abroad. Looking back over the last 100-years, the equity markets have correlated to the development of the United States as a leading global economic power. Only after consideration of our political, industrial, entrepreneurial and economic history, can one appreciate where we have come as a nation and decipher clues as to the potential future path. It would be a grave disservice to those who have paved the way to blatantly disregard our extensive history. Therefore, we have dedicated, as market historians in some respects, a section of our website to a continually evolving historical event and invention register.
History offers invaluable guidance for what may lie ahead. As Oliver Wendell Homes once said, “When I want to understand what is happening today and try to decide what will happen tomorrow; I look back because a page of history is worth a volume of logic.” The question we must ask ourselves is, “What can be learned from past market cycles that can be potentially applied to today’s market environment or perhaps how will tommorrow change as a function of yesterday`s history?"
1900-1909: Consumerism & Materialism
The turn of the century can be characterized as a time when many important inventions would come to the market, all which would have long run implications in the U.S. economy. During this period, Henry Ford invented the assembly line which allowed production of the first affordable car, the Model T, which would cost around $700-$900. Taking a casual Sunday drive became an American past time. In 1900 the Dow Jones Industrial Average (DJIA) stood at 70, and closed at 95 in 1910. Some considered this period to be one of the first eras of “consumerism and materialism.” A few of the major inventions at this time also included the air-conditioner, tractor, and color photography equipment. At this time, Wall Street was controlled by a few large bankers, most notably J.P. Morgan and Andrew Carnegie. The deals they put together amazed much of the Street. For example: When Morgan bought US Steel from Carnegie, he did it for a sum of $500 million which is equivalent to about $300 billion dollars today. Morgan continued financing larger deals including AT&T, Northern Securities, and International Harvestor. At this time, the markets were extremely volatile and witnessed two major panics occurred in 1903 and 1907.
1910-1919: The Dawn of the First World War
This period marked the rise of the U.S. as a world power. Not only did major inventions continue to change everyday life, but changes in the banking sectors and the creation of federal taxation would alter government and its people forever. In 1913, Congress passed the 16th amendment, which enacted the power to tax American incomes. In that same year, the Federal Reserve was founded to provide temporary relief during times of bank panics. In 1911, Standard Oil and American Tobacco controlled a better portion of the World’s oil and tobacco markets and were able to manipulate prices. Therefore, antitrust legislation was enacted and both companies were eventually dissolved. Just thirteen years after the Wright Brothers flew the Kitty Hawk in 1903, the Boeing Company introduced its first model, the Bi-Plane. In 1912, the Titanic sunk and took with it some of Wall Street’s most notable financiers.
By August 1914, all of the world’s financial markets were closed including the NYSE due to massive selling to return money to Europe in the wake of Archduke Francis Ferdinand’s execution and the oncoming World War. The New York Stock Exchange remained closed until December 12th, 1914. Although, the NYSE was closed, “curb trading” would begin to take place in September and the markets would return to their prewar level by the time they reopened. During the war, Wall Street had one of its worst years ever, 1917, where the DJIA slid below the 70 mark. Once the war ended, confidence was restored and the DJIA was able to close above 100 by 1919 for the third time ever.
1920-1929: The Roaring 20`s
The early 1920’s was certainly not the best time for the markets, highlighted by the fact the economy was in a recession until 1921. The DJIA entered the 1920’s coming off a high in 1919 and continued to fall again to the 70 level. After the recession subsided, the economy and the markets began to take off and thus began the “Roaring 20`s.” Many Americans were benefiting from new inventions and products that would make everyday life more enjoyable. One of the most notable inventions was the radio which fueled investor’s enthusiasm. By 1929, almost 10 million Americans had radios. Because of the 1919 ratification of the 18th amendment, it was illegal to manufacture, sell, and consume alcohol - therefore "speakeasies" became quite popular during the 1920’s. The cathode ray tube, a vital piece to the television, became a commercially viable product by 1922. It was also during this time that the mobsters such as Al Capone, who saw the market for illegal alcohol, would become infamous. This decade was also known as the “Age of Jazz,” a style of music became very popular in many speakeasies in the Northeast.
It was during the 1920’s that confidence of individuals was finally restored to the market and they began to place their money on Wall Street. Wall Street brokers, including Charlie Merrill, began advertising in newspapers and magazines. As the markets began to rise, word that quick money could be made in the stock market began to spread and more and more speculative money poured into the market. Many individuals began buying on margin, with very little money actually paid into the account. The DJIA ran to unprecedented levels (all the way to 350) up until the last quarter of 1929 when on October 24th the market collapsed. Over the 4th quarter alone, the DJIA quickly lost a 1/3 of its value, eventually falling all the way to 41. In the wake of the collapse, banks began to fail and many people began to file for bankruptcy, especially those who had brokerage accounts. The economy had entered a new era: the “Great Depression.”
1930-1939: Depression & Recovery
The early 1930’s would mark some of the worst times in the history of Wall Street. As the depression wore on, bank failures became more and more common. The largest bank failure in history occurred early in the depression taking $300 million in depositors funds with it. Unemployment in the U.S. would reach 25%. Some of the more positives changes to come from the depression were the founding of 3 acts: The Exchange Act of 1933, Securities Exchange Act of 1934, and the Glass-Steagall Act. The 1933 Act, sometimes called the “Truth in Securities Act,” required corporations to disclose information regarding the company’s businesses, finances, and management information to investors. The Exchange Act of 1934 was put in place to regulate the secondary markets, the trading and the exchanges. The Glass-Steagall Act was really two acts in one; it took the United States off the Gold Standard and created a separation of Bank and Brokerage. This led to the founding of many new investment banks including Morgan Stanley. Not only was unemployment high, but American families saw their incomes sink about 40%. In addition, a drought crippled many agricultural states - so even those not affected by the market were still crippled by the depression and the corresponding troubling times.
American life did see a few positive notes in these harsh times though; the country entered the “Golden Age of Radio,” and Technicolor film was invented and quickly became a standard. One creative inspiration to come out at this time was MGM`s “The Wizard of Oz.”
1940-1949: A Nation Unites
On December 7, 1941 the United States officially entered World War II when it was unexpectedly attacked by Japan at Pearl Harbor. The 1940’s are typically earmarked by WWII; an event that impacted many aspects of life and the U.S. Economy. Many American men poured into the armed services and as a result women had to fill their shoes in factories for the first time. To help finance the war effort, the U.S. treasury sold bonds in every denomination and even used sporting events to try to raise almost $60 billion needed to support the war effort. Across the nation rations were placed on everyday household items to help support the war effort. The DJIA held strong throughout the war effort and rose from 150 to 200 during the 5 years of the war. By putting itself into production mode to help advance the war effort, the U.S. was able to pull itself out of an inflationary environment. Once the war ended, industries again began to focus on consumers, many of which were ready to begin spending again in the post war, post ration environment. By 1946, the television began to be mass produced and the transistor was being invented. In 1949, the DJIA made a short term bottom before experiencing one of the largest bull markets ever that spanned 16 years and carried the DJIA from below 200 to just shy of 900.
1950-1959: Free Market Capitalism Shines
Despite fear that the U.S. economy would fall into a recession because the government was no longer funding a war, the Post WWII era showed economic resiliency under Republican President Eisenhower who took office in 1952, the first time since 1932 that a Republican occupied the White House. A Republican controlled government shined favorably on Wall Street as the DJIA almost tripled throughout the `50s. Unlike the bull market of the “Roaring Twenties,” this bull market was supported by strong fundamentals especially in defense and aerospace stocks. Mutual funds returned after a thirty year break and people began to trust brokers and the financial markets again.
Established industries such as automobiles flourished along with investment and development of new industries, namely aviation and electronics. Transistor electronics experienced a boom similar to the euphoria over radios thirty years prior. The seeds of globalization were planted when Toyota sold its first car in the U.S. in 1957. The real estate markets around the country also flourished as members of the military were given affordable mortgages. Policies that were enacted after WWII such as the Marshall Plan created new markets for numerous U.S. produced goods as they were sent to dismantled Europe after the war. In 1950, GDP stood at $300 million and increased to more than $500 million by 1960. Part of this rapid increase of GDP is attributed to the government’s continued investment in the military as the Cold War began against communism. With the advent of automobiles, AC, and federally funded interstates, people began moving away from cities to suburbs as well as Sun Belt states. Toward the end of the decade, the recreational sport of bowling became a craze across America as the automatic pinsetter was pioneered by Brunswick. Bowling alleys went up in these new suburban developments. The bowling craze had an impact on the stock market as recreational, building, and material stocks led the way.
1960-1969: Social Reform
“The sixties” will be remembered as an era marked by many radical changes in American society. Three dominant trends characterized this period: the human rights movement, civil rights movement, and anti-war protests against American involvement in Vietnam. At the start of the decade, John F. Kennedy was sworn into office and commanded our country through some very anxious times including the Cuban Missile Crisis. Martin Luther King Jr. led a non-violent protest for African-American rights, but radical spin-offs including the Black Panther party disrupted the peace. The volatile social climate also mirrored the ups and downs experienced on Wall Street. Corporations hoping to maintain high growth rates engaged in hostile takeovers of other companies. Often times these companies were unrelated and huge conglomerates were spawned.
The DJIA slowly climbed toward 1,000 but never reached that mark as investors began to scrutinize the true strength of these conglomerates. Also, during these times of social unrest and economic volatility, the U.S. government became more involved with the economy and social spending by enacting Medicare, food stamps, and revamping the educational system. President Lyndon Johnson increased government spending and arguably triggered domestic inflation toward the end of the 1960`s.
1970-1979: Inflation becomes a Household Name
Inflationary pressure began to accelerate in the 1970`s largely because of undisciplined government spending. However, this did not stop the DJIA from reaching the historic level of 1,000 in 1972. However, these gains would soon be erased. Social turmoil existed as abortion was legalized in a landmark Supreme Court Case. Economic growth was stifled, unemployment increased, and wage stagflation existed as the decade progressed. The resignation of President Nixon in 1974 also exacerbated the problem. The first oil crisis in 1973 caused the DJIA to lose over half its value. This added volatility to the marketplace proved to be beneficial for the maturation of the options and futures markets in Chicago. 1973 was the year when the Black-Scholes option pricing model was introduced, a model still utilized today. After the recession ended in 1974, an important reform occurred on Wall Street that helped the DJIA recoup its losses. For the first time, The New York Stock Exchange (NYSE) allowed for commissions to be negotiated and as a result, discount brokers thrived as small investors put their money to work in the market.
As the decade progressed, investor confidence in the markets fell given the risky social and political environment facing the United States. The U.S. trade balance became negative as cheaper imports from foreign competitors flooded U.S. markets. When President Jimmy Carter took office in 1978 the powerful westernized democracy of the United States was not in a solid state of affairs. Carter implemented voluntary wage and price guidelines to control inflation which failed miserably. During the Iran hostage crisis, oil had risen to $30 a barrel, about 15 times the cost in 1970. Inflation became cancerous and stagflation resulted. In 1979, Paul Volcker became head of the Federal Reserve and inflation was his primary concern. It would take Volcker two years to get inflation under control.
1980-1989: Reaganomics & "The Crash"
The 1980`s will always be touted as the era of “Reaganomics” and an end of the Cold War. When Ronald Reagan was elected in 1980, he saw the economy slump into a recession marred by high interest rates. The government had to bail out the Chrysler Corporation from bankruptcy by securing their debt. Reagan began to cut taxes based on his supply-side economic theory. His conservative policies de-emphasized the government’s role in social and economic policy while drastically reducing personal and corporate taxes to spur economic growth. To take advantage of Reagan’s new tax cuts, companies began issuing stock options again in the early 80s. Coincidentally, the rapid rise of stock options coincided with the Dow Jones Industrial Average’s 17 plus year climb toward over 11,000. Merger and acquisition activity continued at a fevered pace and investment bankers came under the spotlight. Junk bonds became popular among Wall Street’s elite. The rise in the financial markets along with decreased government spending on social welfare programs caused a great disparity among the rich and the poor. The number of new millionaires jumped as well as the number of homeless people living on the streets.
By the mid 1980`s, it was clear that confidence was high in American companies and Wall Street fell in love with companies such as Microsoft, Intel, and Compaq. This climb did not come without a scare as the stock market experienced its largest one day drop in history on October 19, 1987. After the widespread panic that hit the markets in late October of 1987, a presidential commission headed by the Treasury Secretary Jim Baker suggested that the markets adopt several changes. The most significant reform is “circuit breakers” which automatically cause the NYSE to shut down once certain precautionary levels are breached until the problems can be solved. The markets were still able to maintain an upward bias even as the savings and loans crisis unfolded in 1988. As the decade progressed, the Cold War intensified and the spending on this front along with tax cuts caused a substantial Federal deficit. The East Asian Tigers became an ever increasing important factor in World trade. Further, Japan’s economy was admired in the late 1980s under its tight economic policies but its torrid economic growth rate would soon stumble.
1990-2000: The Internet Revolution?
With George H.W. Bush as our commander and chief at the turn of the decade, the U.S. economy experienced a minor setback during Desert Storm and the breakup of the Soviet Union. Some people worried that defense stocks which had been the darlings of Wall Street throughout the Cold War would bring the market down after the Soviet breakup. But skepticism would be replaced with optimism as deregulatory legislation provided a spark to a wave of corporate spending. The U.S. stock market experienced a rapid boom which coincided with President Clinton’s two terms of service. Free market capitalism thrived as policies such as the World Trade Organization and the North American Free Trade Agreement (NAFTA) were enacted. Alan Greenspan, the head of the Federal Reserve, oversaw a robust economy with low inflation, low unemployment, and high productivity. The proliferation of personal computers and the World Wide Web significantly attributed to productivity levels. Telecommunication devices and logistic software revolutionized business processes. The stage was set for a technological boom as entrepreneurs and venture capitalists rushed to capitalize on the internet boom.
The Dow Jones Industrial Average (DJIA) closed above 11,000 for the first time ever on May 3, 1999 and proceeded to run higher until January. From its opening value at the start of the decade, the DJIA more than quadrupled from under 3,000 to over 11,000, but this was not without some troublesome events. On the other side of the world, the East Asian Tigers experienced a financial crisis in the latter part of the decade after years of spectacular economic expansion. Further, the financial markets almost came unraveled when Russia defaulted on its debt and the Federal Reserve had to call upon the private banking sector to bail out the hedge fund Long Term Capital Management (LTCM) from its leveraged positions. LTCM managed to lose $4.6 billion in less than four months. This disrupted the DJIA’s move upward in 1998.
2000-present: Freedom under Fire
The markets faced a turbulent time soon after the turn of the century as the “tech” bubble burst which sent the NASDAQ composite tumbling downward more than 80%. To complicate matters, the Presidential election in 2000 was hotly contested as George W. Bush edged out Al Gore after a recount in Florida. President Bush`s leadership role as Commander in Chief would soon be tested after terrorists destroyed the World Trade Centers, ultimately changing our lives forever. A new war was waged against terrorism by the Western World in an effort to protect democracy highlighted by Saddam Hussein’s removal from power in Iraq.
Aside from political and social turmoil, the financial markets were delivered a drastic blow as a wave of corporate scandals hit Wall Street. With consumer confidence waning, it was clear that the euphoria of the late ‘90s was a distant memory. However, beginning in late 2002, the markets bottomed and began an upward move on the heels of strong M&A activity, low interest rates, and a robust housing market. Earnings growth for S&P 500 companies averaged over 10% for the first 4 and ½ years of the bull market, but has been slowing recently. Numerous investor friendly activities also fueled great advances in the past few years. These activities included strong M&A activity, share buybacks and private equity deals. However recent concerns in the credit market have sparked a downturn in lending, real estate and high-risk hedge funds. This minor crash in the credit market dates back to the substantial reduction in interest rates put in place in 2001 after September 11 and the burst of the technology bubble. These record low rates allowed for unprecedented home and corporate financing. Now it appears the dust of this lending cycle has settled as witnessed by plummeting share prices of lending companies and headlines of financial giants crashing after heavily leveraged betting in the sub-prime mortgage market. But the question still remains if the “sub-prime” saga is the bolt of lightening that will end this latest bull market, or is it the bolt of lightening we don’t see that will derail the bulls.
Past Market “Booms”
Throughout modern day history, several noteworthy “booms” have occurred. Booms are created as a function of market euphoria over new technologies or social trends. They can vary in magnitude and influence over the broad markets. Often times, as with the `90s “Dot-Com Boom”, asset prices soar solely upon speculation, not earnings growth. During speculative “bubbles”, the old adage “buy low, sell high” becomes “buy higher, sell even higher.” The driving factor behind market “booms” often serves as a catalyst to lift the broad markets as investors seemingly can do no wrong and feel bolstered confidence.
After the excitement settles and rational thought returns to the marketplace, inflated asset prices correct and this correction can be quite violent depending upon the size of the upward move, or what ex-Federal Reserve Chairman Greenspan famously coined “irrational exuberance.”
Railroads – 1840`s
Computer time-sharing – 1960`s
Radios – 1920`s
Home computers & biotechnology – 1980`s
Transistor Electronics -1950`s
Internet – Late 1990`s
Bowling Boom – Late 1950`s
Real Estate - Early 2000`s
Reference: 100 Years of Wall Street by Charles R. Geisst
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