Eerie Parallels : Stock Rally: History Has a Message

Is the great Wall Street nightmare over?

Many investors are asking that question in the wake of Tuesday’s and Wednesday’s 289.11-point two-day rebound on the Dow Jones average of industrial stocks. The rally has helped the Dow recover about three-fifths of what it lost in Monday’s historic 508-point crash and sparked renewed optimism.

But, if history is any guide, investors should not get their hopes up too high, at least not yet, analysts said Wednesday. Despite relief among many investors, there is still vast pessimism among professional market watchers.

Do Not See Collapse

Although they don’t foresee an economic collapse like that of the 1930s, many say Monday’s crash and the subsequent two-day rebound bear a striking resemblance to the trading pattern surrounding the great crash of October, 1929, as well as some other major market declines.

Sharp rallies almost always have followed sharp market crashes as investors bought stocks they viewed as bargains. But many of the initial rallies were short-lived as investors used the rebound as an opportunity to bail out at somewhat better prices. They were followed by further declines that, in some cases, drove prices even lower than the initial collapse, reflecting a retreat by investors too frightened to return to the market.

Similarly, some analysts now predict, a second decline could begin as soon as the next two or three days. In many post-crash episodes, it took stocks years--even decades in the 1929 debacle--to surpass the peak set during the previous bull market.

“So far the market is following the (1929) script very closely, it’s almost eerie,” said Jack Schwager, director of futures research for the Paine Webber brokerage house. “Not that you should hang your hat on it, but it’s one factor to consider.”

So analysts advise caution for small investors. Although many stocks look like bargains today, they argue that amateur investors should buy them only as long-term investments. Today’s conditions more closely resemble a bear market, and thus the worst of the stock declines may not be over, many analysts say.

Prognosticator’s Advice

“The most important thing for people to do is to be conservative and cautious,” said Peter G. Eliades, editor of Stockmarket Cycles, a Los Angeles newsletter, and a prognosticator who turned bearish shortly before Monday’s historic plunge.

To be sure, Tuesday’s and Wednesday’s rallies clearly are the result of buyers reentering the market. Some clearly are encouraged by recent declines in interest rates, a stable dollar and moves by the Federal Reserve Board and other central banks around the world to provide new money to boost confidence in the financial system.

“I’m excited about stocks for the first time in about two years,” said Richard H. Fontaine, president of T. Rowe Price Capital Appreciation Fund, a mutual fund that had anticipated rough times and sold most of its stocks before the market crash. But, he said, he is only buying stocks of strong, good quality companies that he plans to hold for the next five or 10 years.

Roller Coaster Swings

Fontaine called the latest two-day rally “a false bounce” that always follows a market crash, adding that most investors would be foolish to try to play potentially volatile roller coaster swings that he predicts will occur in the coming weeks.

“With the market being up some 280 points in two days, you might see some retrenchment,” said John R. Queen, manager of the downtown Los Angeles branch of the Merrill Lynch brokerage firm. “Profit taking is normal for this (type of) market.”

Market historians said that typically it takes a long time for markets to regain the ground lost during severe declines. Edward F. Renshaw, an economist at State University of New York at Albany who has studied bear markets, said severe declines resembling the magnitude of the 36.1% drop between Aug. 25 and Monday occurred in 1969-70 and 1974-75.

All told, Renshaw said, there have been about 13 bear markets of varying severity since World War II, but on average they only gained about 35% in the first year, with the biggest advances in the first month or so.

But the last time the market plummeted as fast as it did in the last two weeks was in October, 1929, when the Dow fell 40.4% between Oct. 14 and Oct. 29, so-called Black Tuesday, with much of the decline occurring in the final two days.

On the two days after Black Tuesday, the Dow regained about three-fifths of its loss on Oct. 28 and 29--just like Tuesday and Wednesday’s rally--giving many investors hope that a new bull market was under way.

Falls Even Lower

But by Nov. 13, 1929, the Dow had fallen to a level even lower than the first decline, and by 1932 the carnage was complete, as the Dow bottomed at a mere 41.22, almost one-tenth of its 1929 peak, noted Kenneth L. Fisher, author of “Wall Street Waltz,” a book of charts chronicling stock market patterns throughout history.

It wasn’t until 1954--25 years later--that the Dow again touched its 1929 peak of 386.10. One reason for the delay: the 1929-32 market collapse was so devastating to investors that it simply drove many of them away from the stock market, many never to return. Many fear that such despair among investors will be the inevitable result of Monday’s market crash.

Whether history repeats itself, analysts say, depends largely on government action. If the government bumbles and inadvertently plunges the economy into a severe recession or depression--which most economists say is unlikely--the market could see a rerun of 1929-32.

Tuesday’s move by the Fed to ease monetary conditions was a step in the right direction, experts said. After the 1929 crash, the Fed tightened monetary conditions, a blunder that helped precipitate the Great Depression.