We continue our blog series: Market Musings, Volume 2, Edition 20, giving our (hopefully not too random) thoughts on recent goings-on in the markets. Today, we present "Investors Who Forget History..."
In these somewhat frothy days (from a market valuation perspective, at least), it is worth remembering what investors were thinking at certain times in the past...and what happened to stocks subsequently. First, let's look at how the market looked to investors as of exactly 89 years ago today (June 27, 1929), as shown from the pages of the Reading (PA) Eagle for June 28, 1929:
"Stock Prices Move Upward...Bullish operations were conducted at a vigorous pace in today's stock market, which completely disregarded the increase of $122,000,000 in brokers' loans last week... Closing Strong...New favorites sprang up in the latter part of the stock market session...":
General Electic (yes, THAT General Electric) hit an all-time high of $322/share, while IBM (yes, THAT IBM) reached a new record high of $210/share (and even U.S. Steel (yes, THAT U.S. Steel) got a shout out at over $191/share):
So things were looking mighty good for investors GE, IBM and X in late-June of 1929. Nothing but blue skies did they see. Similarly, investors in love today with Netflix (NFLX) (around $400/share), Tesla (TSLA) (around $345/share) and Amazon (AMZN) ($1,680/share) see endless riches ahead for these favored companies, who are "disrupting" the incumbents in media, autos and retail, respectively. The future is so bright, NFLX, TSLA and AMZN shareholders need to wear shades, baby!
Fast forward to the financial news for July 8, 1932, as per the financial headlines from the Reading (Pennsylvania) Eagle for July 9th of that year:
"Market 'Placid'...trading dwindled to around the lowest levels of the past eight years..."
The market that day reached its Great Depression low of just 41 for the Dow Industrials (for comparison's sake, today the Dow stands at 24,246, or 591X higher). And what happened to high-fliers GE, IBM and U.S. Steel from June 27, 1929 to July 8, 1932? The following:
GE fell from $322 to $9.50, an overall drop of 97%;
IBM fell from $210 to $55, an overall drop of 74%; and
U.S. Steel fell from $191 and change to $21.75, an overall drop of 89%.
In fairness, during the same period the overall market (as measured by the Dow Industrial Index) fell approximately 87%, so in the context of this broader perspective the returns for GE, IBM and U.S. Steel are not that terrible (as a group, they approximately matched the index). Then again, to a significant extent these behemoths (along with similar investor favorites of the day) were the index at the time (all three companies were Dow components in 1932, while GE and U.S. Steel were also members in 1929) [for the yearly list of Dow Companies, see here]. What really matters when times get frothy is not necessarily "keeping up with the index", but rather "protecting one's capital from incineration" when investors stampede out of stocks. None of this is to say that a market collapse is imminent, because nothing on the horizon seems to imply such a downturn. Then again, nothing on the horizon in late June of 1929 seemed to spook investors then either.
So, Will history rhyme with respect to NFLX, TSLA and AMZN? We think it likely. The real question is not if, but when...
DISCLOSURE: Short NFLX.
Disclosure: I am/we are short NFLX.