Behind the Numbers: The Bear Market of 1933-42
Brian Trumbore
President/Editor, StocksandNews.com

Last week we examined the bear market of 1929-32 and I pointed out that even within this awful cycle that would witness a decline of 89% in the Dow Jones, you still had explosive rallies of both the one-day variety, as well as more extended periods of time.

Now we take a look at the cycle that followed, including FDR's early years in office.

For starters, you'll recall that the all-time low in the Dow Jones was hit on July 8, 1932?41.22?down from the then record high of September 3, 1929?381.17.

Beginning with 7/8/32, the stock market staged some truly explosive rallies over the next few years as follows.

7/8/32-9/7/32?+94% [Dow 41.22 to 79.93]
2/27/33-7/18/33?+117% [50.16 to 108.67]
10/19/33-2/5/34?+31% [84.38 to 110.74]
7/26/34-3/10/37?+127% [85.51 to 194.40]

It all looks pretty good, doesn't it? That is until you examine the record more closely, and now let me throw this in.

3/10/37-4/28/42?-52% [194.40 to 92.92]

Dow Jones 92.92 on April 28, 1942. In other words, about 15% below the level of almost 10 years earlier. So just like last week's conclusion, while investors should take heart from today's solid market performance since the July lows, it may behoove you to keep it in proper perspective, especially when our nation is in a state of war, one which is about to expand in a big way. But to end on a positive note, action in Iraq and potentially beyond may finally set the stage for a true return to good times. In between, however, it could once again get a little hairy.

---

Shifting gears slightly, the above history includes President Roosevelt's initial two terms. You can see how those who believe his economic policies brought us out of the Great Depression and into a roaring bull market are sadly mistaken.

No, it was the war.

Nonetheless, following are some key dates from an economic, as well as geopolitical, standpoint.

--11/8/32: FDR elected, annihilating Herbert Hoover 472-59 in the electoral vote. The next day, the Dow Jones dropped 4.5%, then recovered.

--3/1/33: Bank holidays were declared in six states.

--3/4/33: FDR inaugurated. [It took the 20th Amendment to change this date to its current January 20.] The market was closed on this day and in a special session of Congress, a week- long bank holiday was declared for the period 3/5-3/14.

*The Dow Jones closed on 3/3/33 at 53.84 and reopened on 3/15, at which point it closed that day at 62.10. Now that's a gain of 15.3%. Aside from the fact it's powerful, why is it that when the Wall Street Journal's Market Data Group published a list of the greatest daily Dow percentage gains of all time, this was omitted? It certainly qualifies to me as the largest one-day gain. The fact that the market was closed for a week beforehand should be irrelevant!

--By the end of March 1933, more than 75% of the nation's banks had reopened. Confidence was returning, which helped lead to the above mentioned spurt that took the Dow Jones to 108.

--Between March 31, 1933 and November 8, 1933, Congress approved all manner of acts and agencies, including the Civilian Conservation Corps, TVA, 1933 Securities Act, National Industrial Recovery Act, Public Works Administration, Banking Act of 1933 (which created the FDIC), and the Civil Works Administration.

--12/5/33: Congress repealed Prohibition (the 21st Amendment). But there was no impact on the Dow! Goodness, gracious.

--1934: Record cold in February, then searing heat in the summer helped lead to the incredible drought and disastrous dust bowl conditions. But the banking sector continued to improve and employment was rising.

--6/6/34: The Securities Exchange Act created the SEC.

--6/12/34: Trade Agreements Act allowed FDR to cut tariffs 50% to countries granting the U.S. most-favored-nation status. This helped make up for the damage created by Smoot-Hawley (more next week).

--7/16/34: The first general strike in U.S. history as 12,000 members of the International Longshoremen's Association struck. No impact on the Dow Jones was seen.

--5/27/35: The Supreme Court ruled that the National Industrial Recovery Act was unconstitutional. The Dow fell 2.6% on the news.

--12/12/37: A U.S. gunboat was sunk in Chinese waters by the Japanese (two killed). The Japanese, who were at war with China, apologized on 12/14. The Dow fell 3.2% on the news, but then recovered.

--1938: Hitler begins to move, taking Austria in March and then negotiating the annexation of Czech Sudetenland with the signing of the Munich agreement. Wall Street, clueless as usual in these instances, inches up.

--8/24/39: Russia and Germany sign non-aggression pact. Dow is up 3.8% two days later.

--9/1/39: Germany blitzes Poland. The Dow closes at 135.25 that day and 138.09 on 9/2. Then you have Sunday and Labor Day (the market was open on Saturdays back then), so on 9/5 you'd expect rational thinking to have entered the minds of the trading public in the U.S. Wrong. The Dow rallied to 148.12, for a pickup of 10% since the invasion. Idiots. It wasn't until May 1940 that the Dow began to plummet, as the Nazis rolled through the Netherlands and Belgium and were on the verge of taking Paris.

We'll stop there. I've covered World War II in earlier pieces. Bottom line, I think I've proved that history reminds us to be careful when the world is in crisis.

Sources:

Birinyi Associates
Wall Street Journal
"The Dow Jones Averages: 1885-1995," edited by Phyllis S. Pierce
"The Encyclopedia of American Facts and Dates," Gorton Carruth
Ibbotson Associates Yearbook

*Next week?the Smoot-Hawley Act of 1930.

Brian Trumbore