By Mark Hulbert
The ‘Roaring ’20s’ wasn’t an uninterrupted, money-making bull market
Gullible investors are being lured back into the stock market with visions of another “Roaring ’20s.” They may want to look more closely at that decade a century ago.
Though the U.S. stock market did soar in the latter half of the 1920s, the first half of the decade experienced “a deflationary depression” in which “unemployment reached the double digits, farm incomes collapsed, [and] industrial production plunged.” One prominent economist at the time pronounced that the world was “nearer collapse than at any time since the downfall of the Roman Empire.”
James Grant, editor of the Grant’s Interest Rate Observer newsletter, calls what happened in the early 1920s the “forgotten depression,” since so few investors today are aware of it. (The quotations in the above paragraph are from him.) Grant covers this misunderstood period of U.S. history in his book, “The Forgotten Depression: 1921, The Crash that Cured Itself.”
This history is important to show that pent-up consumer demand from a period of economic lockdown is not sufficient to prevent a depression. Similar to conditions over the past 12 months, the decade of the 1920s began with the U.S. emerging from a pandemic that had included widespread economic lockdowns. Furthermore, that decade began a little more than year following the end of World War I and the loosening of the restrictions that had put the U.S. economy on a wartime footing.
As Grant puts it, “the long-thwarted American consumer celebrated… by making the cash registers ring….[P]lants were operating at full tilt, raw materials were unobtainable except at markups to quoted prices and delivery dates were being pushed way out into the future.” The parallels to today are many.
Read: Economist predicts a ‘whopper’ of recession in 2023 — and that’s not necessarily due to higher interest rates
Nevertheless, despite this promising start, by late summer 1921, according to Grant, dozens of “companies were valued at less than their working capital.” Many were selling at “one-third of their intrinsic values.” The Dow Jones Industrial Average in August 1921 traded 47% lower than where it had been in late 1919.
What happened? There was no one factor, of course, and not all economists agree on which factors were most important. Those interested in reading more about this history should read “The Forgotten Depression.” But what’s relevant to this discussion is that the stereotypical picture of the Roaring ’20s that today’s investors have in mind is not an accurate picture of the first half of the 1920s.
In fact, as you can see from the chart above, the Dow didn’t make it back to its November 1919 level until December 1924. In a very real sense, therefore, the “Roaring Twenties” refers to just the last half of that decade; perhaps we should call it the “Roaring Late ’20s.”
The huge impact of how history is written
Why are so few of us aware of the economic depression and associated bear market of the early 1920s? A big reason is that most analyses of U.S. stock market history extend back only to December 1925. That’s the earliest month in the historical database maintained by the University of Chicago’s Center for Research on Security Prices (CRSP). The CRSP database is the gold standard for U.S. stock market data, and is the basis of the famous Ibbotson database (now part of investment research firm Morningstar).
There’s no methodological, statistical, or theoretical reason for why that database should begin in 1925. It could have gone back much further. In recent years, for example, Edward McQuarrie, professor emeritus at the Leavey School of Business at California’s Santa Clara University, completed a database of the U.S. stock and bond markets back to 1793. As I’ve written before, the picture painted by McQuarrie’s database differs in several crucial respects from the one painted by the Ibbotson database.
Why was late 1925 chosen as the start date? In an email, McQuarrie wrote that “My understanding is that the University of Chicago team that collected the original data for CRSP in the early 1960s ran out of time and/or money as they got back that far.”
There is no indication that this decision to stop in late 1925 was anything other than innocent. Yet it’s had pernicious consequences, including that we misleadingly paint the 1920s stock market up through the 1929 crash with a single bullish brushstroke.
So be careful what you wish for. If the next decade is the replay of the 1920s that many are fantasizing about, the stock market’s decline is just getting started.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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-Mark Hulbert
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09-03-22 1047ET
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Read More: The ‘forgotten depression’ of the post-pandemic 1920s has stark lessons for us now