I took another long look at the 1932 - 37 era of the Great Depression, when the economy,
profits and the stock market came off the '32 lows on the wings of massive QE by the Fed.
This epoch compares nicely to the current 2009 - 2014 era. Over the former period, a
post traumatic syndrome struck nation experienced growth stall outs and weak stock
markets when the Fed relented on QE just as we have seen in recent times. Back then,
credit was scarce in the system and public confidence was low just as we have experienced
over the past few years. So, then as now, monetary liquidity was the life blood of the
economy. There was a final QE surge over the 1935 -36 period that pushed up production
and earnings, and with investor enthusiasm running high, the SP 500 rose to 18 x net per
share by early 1937. With the punch bowl removed in '37, the economy went into recession
and the stock market tanked. It was years before the market regained the bullish magic. If we
press the analog, we would expect the QE punch bowl to be removed before the end of
2013 and for the market to hit a major cyclical top in 2014.
My concern recently is that the US economy has been responding anemically to the current
big QE program which we cannot say for the 1932 - 37 era when FDR was tinkering with
fiscal stimulus programs and production growth, though volatile, was more robust. As well,
the debt load was lighter back then, too.
The very limited case history I am using would suggest that the stock market could well
remain exceptionally strong until the Fed shrinks or eliminates the big QE program now in
force provided there is sufficient economic progress in real terms to keep investor
confidence on a positive bearing. Ironically, and here is where the analog with the 1930s
could break down, a significant acceleration of real economic growth coupled with a degree
of cyclical inflation could actually punish the stock market as some players would worry
that the current liquidity gravy train would be derailed. And, I suppose, such a correction
Right now, with big QE laid on and a low investor threshold for what is good enough
economic progress, the market rolls on up just as it did from early 1935 to early 1937.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!