Analysts Look to 1929 for Clues to Direction of Current Bear Market

Times Staff Writer

In October, 1929, following the Great Crash, President Herbert Hoover told the nation that the economy was fundamentally sound. Stocks, after a brief slump, rallied over the next few months and made up nearly half of their losses from the crash.

In October, 1987, following the latest Great Crash, President Reagan too told the nation that the economy was fundamentally sound. And true to form, stocks, after a brief downturn, also have rallied since then, although they haven't yet made up half of their crash losses.

While the price movements and other patterns of the 1987-88 market haven't precisely mirrored those of nearly 60 years ago, they are close enough that many analysts see in the 1929-32 bear market clues as to what might happen over the next few months in the current bear market.

"It's just eerie; history always has a way of repeating itself," says Ralph Acampora, technical analyst at Kidder, Peabody & Co.

"The market is showing a good deal of the same uneasiness and insecurity that it did after the 1929 crash," says Harvard economist John Kenneth Galbraith, author of "The Great Crash," a book on the 1929 debacle. He and other 1929 watchers note that last week's 113-point rally, followed by Friday's 140.58-point free-fall, fit the pattern of volatile rallies and corrections in the early stages of a post-crash bear market.

If the general similarities persist, investors could be in for a crushing ride over the next three years.

After a "sucker's rally" in which the Dow Jones industrial average regained about 50% of its loss after bottoming out on Nov. 13, 1929, the index then embarked on a long, slow decline. It ended up on July 8, 1932, at only 41.22--about one-tenth of its value at the peak in September, 1929.

If that same pattern were repeated this time, the Dow could rise to as high as 2,200, only to tumble to around 300, which would be its lowest level since about 1954.

However, even the most pessimistic analysts don't think 300 on the Dow is likely. They say there is a danger in drawing too many parallels with the 1929-32 period because history never repeats itself exactly.

"The lessons of 1929 into the 1930s are applicable to today, but in a general sense," says Robert R. Prechter, editor of the Elliott Wave Theorist, a Gainesville, Ga., newsletter. "If you draw parallels that are too specific, you can get lost in the trees and miss the forest."

Still, the similarities abound. In 1929, the Dow fell about 39.6% from its Sept. 3 peak to its Oct. 29 crash close. In 1987, the average fell about 36.1% from its Aug. 25 peak to its Oct. 19 low.

Or consider the movements of the Dow in the first week following the two crashes. The 22.6% decline of the Dow on Black Monday, Oct. 19, 1987, mirrored the two-day, 23% collapse on Oct. 28-29, 1929. In the two days following the 1987 crash, the Dow rallied 17%; in 1929, the Dow regained about 19%.

There are other similarities, too. Both crashes came as the nation moved further to the right politically; both came amid booms in mergers and acquisitions, and both were preceded by peaks in real estate prices a few years before, notes Kenneth L. Fisher, a Woodside, Calif., money manager and author of "Wall Street Waltz," a book charting stock price movements. Even fashion trends were similar: Hemlines were on the rise in both 1929 and 1987, Fisher notes.

To be sure, there have been noticeable aberrations as well. In 1929, the Dow tumbled to a new low on Nov. 13; this time around, the Oct. 19 crash low has endured, although on Dec. 4 the Dow closed within 28 points of the Black Monday close.

Forecasters think that a Dow as low as 300 is highly unlikely because the massive 1929-32 decline came about largely as a result of the Great Depression, marked by widespread bank failures, a falling money supply, rising trade wars and other woes.

A repeat of such a calamity is unlikely today because of such safety nets as federal insurance on bank deposits, farm price supports and Social Security, economist Galbraith argues.

"The government now has overall responsibility for coming to the support of the economy, which it didn't then," Galbraith says. "I wouldn't draw too-close parallels."

However, many analysts say a prolonged slump in stock prices is possible because many of the same forces of investor psychology that were working during the 1929-32 market slump are repeating themselves today.

The initial post-crash rallies in both 1929 and 1987 were sparked largely by bargain hunters looking for cheap stocks and by short-term traders seeking to make quick profits from a bounce in prices, says Stan Weinstein, editor of the Professional Tape Reader, a Hollywood, Fla., newsletter.

But such a rally eventually will fizzle out because other investors who failed to get out during the crash see the rally as an opportunity to recoup their losses, Weinstein explains. That selling pressure, along with profit taking from the short-term traders who came in at the crash lows, pushes stocks back down until they get sufficiently low for new bargain hunters to come in.

"People always think we're entering a new era, but the patterns through history don't look all that different," Weinstein says. "That's because the investor psychology doesn't change; it's always greed, it's always fear."

Could Persist

Weinstein and a few other analysts accordingly think a low of anywhere between 1,200 and 1,600 is more realistic. Others, however, aren't predicting numerical lows for the Dow but rather are contending that the current bear market will be longer than the 1929-32 episode.

Newsletter editor Prechter, for example, contends that the current bear market could persist well into the early 1990s. He and some other observers argue that the nation's current financial problems are actually worse than they were in 1929. For example, the United States was a creditor nation, whereas now it is a net debtor. Also, the nation ran a trade surplus in 1929; now it runs a huge trade deficit.

Stan Berge, a technical analyst with Tucker, Anthony & R. L. Day, also contends that stocks are more overvalued now than in 1929, compared to bonds. Long-term government bonds yielded about 3.7% when the market peaked in September, 1929, versus about 9% in the 1987 peak, Berge notes. On the other hand, price/earnings ratios--which measure the multiple of stock prices over earnings per share--were about 20 in both cases.

One big clue to the market's ultimate low may be what the Federal Reserve does with the nation's money supply--and whether it can do any good to prevent a recession.

Watching Fed

Following the 1929 crash, the Fed--in an effort to stimulate the economy--cut the discount rate several times, from 6% around the crash (the same level it is today) to as low as 1% by the mid-1930s, notes Donald Hoppe, editor of the Kondratieff Wave Analyst, a Crystal Lake, Ill., newsletter. But the money supply contracted anyway, as bank loans and then banks failed in droves, precipitating the Depression.

Now, after initially expanding credit immediately following the crash, the Fed has been tightening the money supply.

"Never underestimate the capability of the collective governments of the world to make stupid mistakes," says money manager Fisher, contending that such tightness could throw the economy into a recession.

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