1929 Analogies Only Go So Far

Includes: DIA, QQQ, SPY
by: Robert Wagner

Executive summary:

  • Comparisons to 1929 are based upon very shallow analysis.
  • Valuations and optimism were much higher in 1929.
  • 1929 was the end of a 10 year bull market.
  • In 1929 the market was highly leveraged and monetary policy was tight.


I can't tell you how many times I read articles comparing the markets to 1929 throughout my career. Every time the market has had a nice run some writer will write an article about how the current market looks ominously like 1929, and this time is no different. Almost always the only data they will have is a chart pattern overlaying a chart pattern of 1929.

(Image Source)

Given the way these reports go, almost any time you have an uptrend for a year or two you can make the analogy. Problem is, it is very shallow analysis, and considering we have only had 1929, 1974, 1987, 2001 and 2008 to speak of, and I've read countless "1929 is coming" articles in my time, they don't tend to be very prophetic. I guess the authors go by the "broke clock" theory hoping that if they run the article enough they will eventually be right. All it takes in this industry to make a career is to call one market crash, so why not use the shotgun approach? You always see advertisements claiming "the man who called the 1987 crash," but you never see advertisements touting how many wrong predictions it took to get that one right.

Here are just a few problems with the current analysis.

1) In the above chart the 1929 Dow goes from 200 to 375 for a gain of 87.5%, the current Dow goes from 13,000 to 16,400 for a gain of 26.2%. The chart shows the current gain is less than 1/3rd that of 1929. The only reason the charts line up is because the author used different Y-Axis scales.

2) The crash of 1929 occurred at the end of an extended bull market. The roaring '20s was the height of optimism. In 1929 the Empire State Building, Chrysler Building and Rockefeller Center were all under construction or in the planning stage. The future could not have looked any brighter than in 1929. Today we are in a near depression and the Dow is just recovering the losses made since 2008.

3) In 1929 the Federal Reserve was increasing interest rates and money was very tight. Today there is record liquidity, and rates are at or near historic lows.

4) The P/E in 1929 was near 30 and short-term rates were near 6%; today the P/E of 15.85 is barely 1/2 the 1929 level and short-term rates are basically 0%.

5) The stock market in 1929 was highly leveraged; today corporations have record levels of cash.

6) Markets climb a "wall of worry," they don't crash during periods of worry. Markets crash when everyone is partying in the streets. Just take a look outside, even the weather is depressing.

7) Market crashes tend to occur in the 4th quarter. We are in the 1st.

In conclusion, don't put a lot of faith in the 1929 analogies. 1929 was a strong year for stocks and the chart pattern was a nice up-trend. Up-trends happen all the time. With nearly 90 years of history there are plenty of patterns similar to 1929, especially if you don't adjust for scale. 1929 was a unique time in our history, and it took a certain set of circumstances to trigger it. Those events are highly unlikely to ever happen again. Each crash has its own causes and character, and yes, many of them do have chart patterns like 1929 because rallies tend to precede crashes, but there are plenty more similar patterns that don't result in a crash. Right now the underlying fundamentals don't favor a market crash unless it is triggered by some external/exogenous event, and those are purely random.

Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.