Wall Street History

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Wall Street History

08/23/2002

Behind the Numbers: 1933-42

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.

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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

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