A Bang Or A Whimper?


J.P. Morgan did not have much use for either the stock market or reporters. So when one reporter importunately asked him what the market was going to do one day, he replied, with about equal parts contempt and truth, “It will fluctuate.”

Until the spectacular events of late October, however, the stock market has been doing little fluctuating. Mostly it has just gone up and up and up. After all, I was just into my twenties when the Dow Jones industrial average first hit a thousand, and I was over forty when it finally reached two thousand. Only a decade later it soared, seemingly effortlessly, past eight thousand.

The explanations, of course, have been endless, for that is what today’s financial reporters, like those in Morgan’s day, are paid to do. The American economy is in better shape than it has been in a long time. The computer and globalization are opening vast new opportunities for productive investment. The baby boomers, in their peak earning years and increasingly past their peak child-rearing expenses, are pouring money into stocks and mutual funds to provide for retirement. And so the market keeps rising and rising.

All bull markets come to an end some day. But whether they end with a bang or a whimper can’t be foretold, for the particular economic circumstances are always unique. In the 1920s, for instance, the Dow Jones rose from 68.3 at the end of October 1921 to 381.17 on September 2, 1929. Then the market trended relatively gently downward until late October, when in two wild days, Black Thursday, October 24, and Black Tuesday, the following week, the bottom dropped out. By November 13 the market capitalization of the stocks listed on the New York Stock Exchange, eighty billion dollars in early September, had been reduced to fifty billion, a decline of more than a third.

And while there are now relatively few who personally remember the Crash of ’29, it has become an ineradicable part of the American folk memory. For while it did not cause it, the Crash happened at the very beginning of what soon became the deepest economic depression the modern world has known. By the time the Dow finally hit bottom in 1933, it was barely one-tenth of what it had been less than four years earlier, and virtually where it had been on January 1, 1900. The capital gains of a third of a century had been wiped out.

The bull market of the early 1980s, however, while it ended in a similar great crash, on October 19, 1987, was followed by something completely different. The Federal Reserve, having learned the lessons of 1929, acted immediately to ensure liquidity in the market, preventing the crash from feeding on itself. As a result, the uproar on Wall Street did not greatly affect the American economy as a whole. Indeed, the market almost immediately began to climb again, and today, only a decade later, the crash of ’87 is hardly remembered at all.

Another Wall Street bull market, however, came to an end in a very different manner than either 1929 or 1987. At the end of April 1942, the Dow Jones sank beneath a hundred for what turned out to be the last time. The Second World War, which the United States had entered only a few months earlier, was going very badly for us. But as the American war machine began to crank up to full speed, corporate profits, despite wartime price controls, rose swiftly. The size of the American economy nearly doubled in the war years, and corporate profits reached more than two and a half times their pre-Depression levels.

Curiously, stock prices did not follow suit. The public, with all-too-vivid memories of 1929, was still afraid of the stock market. Further, most economists were predicting a return to depression once the stimulus of the war was removed. So, although per capita disposable income nearly doubled between 1940 and 1945, the public did not invest it in stocks. Instead people paid down their automobile and mortgage loans and massively increased their personal savings. Americans saved $4.2 billion in 1940. In 1944 they saved $36.9 billion. Most of this went into insured savings accounts and government war bonds, not Wall Street.

The economists, however, were wrong in their predictions, as they usually are. As vast disposable income was piling up in bank accounts and war bonds, vast demand was piling up for the new automobiles, refrigerators, housing, and other capital goods that were unobtainable during the war.

This great demand fueled a boom, not a bust, in the American economy. But Wall Street still stayed in the doldrums that it had been in since the Depression. In 1947, million-share days, which were first achieved in the 1880s, were relatively rare. Brokers with little to do sometimes played baseball on the floor of the exchange with rolled up newspapers and crumpled quotation sheets for bats and balls. Such blue-chip stocks as Firestone and Jones & Laughlin Steel were selling for less than four times earnings, and many were paying 8 to 12 percent in dividends, far above what bonds were paying. As late as December 31, 1949, the Dow Jones average stood at only two hundred, less than twice what it had been in 1940, although the gross national product had nearly tripled and corporate profits had done far better than that.