Blogs & Comment

25 years of no gains?

Buy-and-hold and other investors may be getting a tad anxious about the parallels increasingly being drawn between the current financial crisis and the one some 75 years ago that spawned the Great Depression of the 1930s. Indeed, if history repeats, it could be another 25 years (or similarly long period) before stock markets regain their peaks of 2007.
But it is commonly believed the Great Depression had its origin in policy errors. The Federal Reserve had nearly halved its discount rate by 1931 and there were signs of stability emerging. Then, concerned about the outflow of gold caused by lower interest rates (U.S. was on the gold standard at the time), the Fed hiked interest rates by the largest amount since its founding in 1914 — and turned a recession into a depression.
So, if the Fed can avoid committing such policy errors, a monumental banking crisisneed not entail a depression and 25 years of no gains in stock markets. And given the current Fed chairman is an ardent student of the Great Depression, the odds are looking good such mistakes wont be repeated.
If one still feels the urge to sell, how about waiting for market rallies? As I recall, the two greatest rallies in U.S. stock markets occurred in the midst of the Great Depression. Extreme bouts of pessimism are the mother of extreme upward moves it would seem; over the three months to September of 1932, the S&P 500 rocketed upward by 150%. The index then lost 25% of its value over the next three months, and returned to an upward trajectory over the first half of 1933, gaining 120%.