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This Market Is Looking a Lot Like 1937


At that time, no one knew what would happen when federal stimulus money ceased to flow into the economy. Sound familiar?

At the moment, it seems that everyone wants to compare this year to a past year in market history. I've seen many articles floating around the Internet on this theme. Some are comparing the recent five-year bull market to the bull market of the 1920s, saying it will end in destruction; others are comparing this to 2004 or 2005, both grinding years.
History may rhyme, but it never repeats the exact same pattern. I do think, however, that I've found a time period that this climate is very similar to.   
What we must remember about the last five years is they've been unique in market and economic history in that the Federal Reserve has added more than $3 trillion to its balance sheet. The Fed has printed more than $1.4 trillion since November 2012.
Therefore, when I was looking for a similar pattern in history, I had to find a time period in which there was a market crisis (similar to that of 2008-2009) followed by a government-assisted rebound. I also wanted to find a bull market that was similar to this one in terms of time and scope.
After looking at past markets, I really only found one that made sense: the bull market of 1932 to 1937.
Here are the similarities: 
1. From 1929 to 1932, the stock market crashed, losing 89% of its value. From 2007 to 2009, the market lost more than 65% of its value. In each case, banks failed and the financial system stalled to a halt. They were both huge bear markets in time, size, and scope.
2. In 1933, President Roosevelt devalued the dollar when he changed the official gold price to $35 from $20. This was a defacto devaluation and a form of monetary stimulus. He also created a bank holiday so that the government could send inspectors into bank vaults to determine which banks were strong and which weren't. He then started a fiscal stimulus program: Government spending increased from just over $4 billion in 1932 to over $9 billion by 1937.   
3. The stock market responded positively to the devaluation and the stimulus, going from just about 41 to over 190 by 1937. Likewise, since 2009, when the Fed expanded its balance sheet, the Dow Jones Industrial Average (INDEXDJX:.DJI) has rallied from a low of 666 in 2009 to near 1880 today. In addition, in certain bubble categories (such as biotech or 3-D printing), stocks began to go parabolic in November 2012 -- right about the time the Fed began to print $85 billion a month.
4. In 1937, Roosevelt decided to take away the stimulus. The government wanted to cut the deficit and see if the economy and stock market could hold up on its own. It didn't work. The Dow, which had traded at over 190 in early 1937, fell to 120 by the fall of 1937 and bottomed out at less than 100 in the spring of 1938. When all was said and done, the market fell nearly 49% in value.
As the fed has slowly begun to taper, some of the former high-flying sector ETFs, such as Global X Social Media Index ETF (NASDAQ:SOCL) and iShares Nasdaq Biotechnology Index ETF (NASDAQ:IBB), have begun to crack. Both are roughly down 20% from their highs.
Will this end up like 1937?

If the Fed continues to taper, does it taper too much? Does the selling spill over into the major indices? Will the Fed's actions fail us just as Roosevelt's failed in 1937? Only time will tell.

In 1937, no one had ever seen the type of fiscal stimulus Roosevelt had instituted, and no one knew what would happen when it was removed. Today, no one has ever seen a monetary stimulus like the one the Fed has undertaken.
The bulls have been warned: The market action is very similar to 1937, and that's not a positive thing.

Also see: Lloyd Khaner: It's Beginning to Feel a Lot Like 2000
No positions in stocks mentioned.
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