I wrote a story for CNBC’s Grow site yesterday about the stock market’s remarkable turnaround. Down more 30% in March, but now up almost 50% since then…a run that has put S&P 500 investors right back where they were on New Year’s Eve. What happens next? I sure don’t know. But in the story, I explain the case for all three possibilities — up, down, and sideways. Give the full story a read at Grow. But below is a tease. The tl;dr is: Don’t ignore history.
The case for down: The “downs” — the bears — have a powerful argument in history. What’s happening now looks a lot like what happened in the spring of 1930. Market historians remember that in the months following the 1929 stock market crash, the Dow Jones industrial average rallied about 50%, retracing much of its losses. But that was a mirage, a “bear market trap.” As reality set in, and it became obvious the Great Depression would be a long-term drag on the economy, stocks began a slow, steady hemorrhaging. Within two more years, stocks in the Dow had lost about 80% of their value.
“Stocks are [behaving] very much like that rebound in 1929 where there is absolute conviction that the virus will be under control and that massive monetary and fiscal stimuli will reinvigorate the economy,” financial analyst Gary Shilling warned on CNBC in June.
But you don’t have to look back so far to see this pattern. The dot com bubble burst in March 2010, but by August, the tech-heavy Nasdaq index had retraced about half its losses. Then, the bottom fell out, and tech investors were in for two years of heavy losses.
I am 44 years old and very conservative with about a 60/40 stocks/ bonds mix in my 401K. I am no economist, but with $3T in stimulus, the government is going to have to inflate to keep things going. That’s why to me, stocks, real estate and gold all look very attractive, as it will simply take more dollars to buy them in the future.