It’s Happening Again…

A fascinating pattern has emerged in the U.S. stock market – one we’ve seen about 100 years ago.

In the early 1920s, after a decade of sideways movement and 2 violent 50% declines, stocks began an aggressive upward march.

That 1920s melt-up became the most spectacular market performance ever recorded at that time.

Of course, it also sowed the seeds for what followed: the worst market crash and economic downturn in modern history.

Today’s we’re seeing a similar pattern.

After a decade of major indices moving sideways with two 50% declines, we’ve entered one of the most sustained uptrends in financial history.

When we overlay the 1920s price action with today’s market, the similarities are undeniable.

But beyond price patterns, we need to examine whether today’s fundamental forces mirror the 1920s environment.

Key Differences: The Fed Factor

Today’s Federal Reserve is fundamentally different from its 1920s predecessor.

Both Milton Friedman and former Fed Chair Ben Bernanke have stated that the Fed actually caused the Great Depression.

This was likely because of the Fed’s inexperience and limited data at the time.

Real interest rates shows the actual story here, which is heavily influence by the Fed’s actions.

When real rates are high it incentivizes saving over spending, slowing the economy.

The opposite is true when real rates are low.

During economic downturns, the Fed typically lowers real rates to stimulate the economy.

However, during the Great Depression, they soared to 10% – effectively encouraging saving over spending during history’s worst crisis.

Today’s Fed has learned from this though and is unlikely to repeat it.

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Dangerous Similarities Between Today and the 1920s

Despite Fed differences, there are striking similarities in some key themes between today and the 1920s.

The first is rising wealth inequality.

Over the last 20 years, the share of wealth held by the ultra-rich has surged, similar to how it rose in the early 1900s.

Back then, 1929 marked the peak in wealth inequality. Today, we’re already around similar levels as 1929.

In the 1920s, rising inequality fueled political polarity and global tensions.

While not direct causes of the Great Depression, these factors amplified its severity by impacting consumer psychology and global trade.

 

Another similarity lies in technological disruption.

In the early 1900s, tractors and machinery allowed businesses to increase output, while employing fewer workers.

Skills valuable in 1900 became obsolete by 1930, triggering something called structural unemployment.

This caused the unemployment rate to spike to 25% during the peak of the Great Depression.

Today, AI poses a similar threat.

Goldman Sachs research suggests 300 million jobs globally could be displaced, with 60% of advanced economy jobs at risk because of AI.

But despite their prediction of layoffs beginning in 2024, initial jobless claims still remain near historic lows.

While layoffs haven’t started yet, it doesn’t mean that it won’t happen in the near future.

Layoffs often occur in sharp, rapid bursts. But most of the time, jobless claims are moving lower.

This is because companies typically avoid job cuts until economic conditions force their hand.

So, once layoffs begin, they tend to gain momentum, leading to significant increases in unemployment.

For the stock market, rising initial claims has historically been associated with sharp declines.

A strong labor market in 2024 kept us optimistic on the stock market, but if the labor market cracks, then all bets are off on the stock market.

Another parallel between today and 1929 is widespread greed.

In 1929, optimism about the market was at extremely elevated levels.

Today, a record 55% of investors expect higher stocks in the next 6 months – the highest reading since this survey began in 1987.

This extreme optimism comes as the Shiller PE ratio, developed by a Nobel Prize economist, shows that stocks are even more expensive than at the 1929 peak.

Despite these risks, we do not believe another Great Depression is imminent.

Today’s authorities are unlikely to repeat the mistakes of the past.

However, long-term investors should remain cautious and consider the risks in today’s market environment.

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While momentum lasts, there’s long opportunity, but we aim to get defensive as soon as signs of a market turn start to show.

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