A Bang Or A Whimper?

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In the seventies there was again talk that Wall Street was dead. A seat on the exchange cost less than a taxi medallion.

Finally, one of Wall Street’s oldest adages, “Sell on trumpets, buy on drums,” proved true once again. The trumpets that had heralded the triumph of World War II had not sparked a real rally. But as the drumbeats of the 1953-54 recession began to be heard, the market unexpectedly took off. The Dow stood at only 264.04 on September 30, 1953. The following year it smashed through the 1929 record of 381.17 that had stood for twenty-five years. On November 14, 1972, it crossed a thousand for the first time.

But having crossed the magic point of one thousand, the bull market suddenly ended. There was no crash on huge volume, no renewed depression. Instead, the market simply … stalled. The Dow would break through a thousand on four more occasions in the ensuing years, but each time it quickly fell back. It would be more than a decade and a half before, on its fifth try, the Dow broke through one thousand for good, in 1982.

What happened? Why was this bull market different? There are several reasons. First, the period from 1953 to 1966 was, in many ways, not so much a bull market, which thrives on predictions of a rosy future, as a market simply catching up with economic reality. As the long shadow of 1929 gradually faded, people once more began moving into stocks that had been seriously undervalued for years. So there was never a speculative bubble as there had been in 1929, when the market lost touch with the underlying economy. Nor had the new forces that greatly exacerbated the crash of 1987, such as unregulated computer trading, yet been invented.

Further, if you look at a chart of the Dow Jones from the mid-sixties to the early eighties, its apparent stagnation was, in some ways, only apparent. Lurking within it, hidden by inflation, was one of the worst bear markets in Wall Street history.

With the conclusion of the Vietnam War in December 1972, the market rallied, and on January 11, 1973, it hit a new all-time high of 1,051.70. Corporate profits were good in 1972 and better in 1973. But that was about all that was right with the economy. By the fall of 1973 the “three I’s”—inflation, interest rates, and impeachment—were increasingly worrisome. When the oil embargo caused long lines at gas stations, the market, dropping day by day rather than all at once, lost fully 20 percent of its value between October 26 and December 12.

The next year was even worse. While the gross national product declined by 2 percent in a modest recession, inflation roared ahead at 12 percent. People abandoned the stock market in droves. Thirty percent of American families owned stock in 1970, while only 21 percent did in 1973. New forms of investment, such as money market funds, attracted investors away from Wall Street. With ever-rising interest rates, they were paying 8 to 9 percent, compounded daily, and were much safer than stocks.

As a result stocks sank another 24 percent in 1974. In two years the market capitalization of New York Stock Exchange issues lost almost 50 percent of its value. But had it not been for the galloping inflation those years (around 12 percent in 1973 and 1974) the damage would have been far worse: a drop of more than two-thirds. Not as bad as 1929–33, but still, by a wide margin, the second worse bear market of the twentieth century.

Just as in the 1930s, there was widespread talk that Wall Street was finished as a major financial player. A seat on the exchange was selling for less than the cost of a New York City taxi medallion. The amount of vacant office space in downtown Manhattan was growing swiftly. There were even calls for another Reconstruction Finance Corporation.

But bear markets, like bull ones, come to an end, and the Dow in the first six months of 1975 regained much of what it had lost in the previous two years. Wall Street survived and the 1970s are today nearly as distant a memory as the 1930s, and the new bull roars on. Whether this one will end with a bang or a whimper is anyone’s guess. But end, one day, it most certainly will.