By Neil Szczepanski, Tradeology
Many of us active in the markets today were not around in 1937. In the stock market crash of 1937, there was a 50 percent drop in value that took about 17 years to recover. If you had $100 invested in the stock market, you would have just $50 after the drop. As with many drawdowns, we as traders and investors have to endure the crash of 1937. It was a particularly difficult one because of how fast and how large it was.
So, why it is important to understand the history of this? Today we can see many similarities to the stock crash of 1937.
One of the premiere experts of predicting stock market downturns, Ray Dialo, believes there are four main similarities between the crash of 1937 and today’s market.
The first similarity is the Short-term Debt Cycle.
From 1932 to 1938 there was 321.8 percent gain in the market. If we compare this to 2009 to 2019 stocks have gone up 325.72%. It feels like we are in the eighth inning of the bull market cycle. We have a tight monetary policy currently, and our economic growth has been off the charts. To slow the growth the FOMC usually raises interest rates, but when that happens it becomes more expensive for businesses and people to borrow money. This could start to slow the economy. The FOMC has been cutting rates to keep the economic growth going to delay the impending slowdown. This happened in the 1930s and is happening now.
The second similarity is Political Polarity.
The last time divisiveness in the US was as high as it is today was back in the 1930s. In the 1930s the top 0.1 percent of people had the same wealth as the bottom 99 percent of people. Today, we seem the same thing; we have increased disparity between the rich and the rest of the population which further divides the country. In this state you tend to get extreme characters on either end of the political party.
The third similarity is being late in the long-term debt cycle.
In 1930 to 1932, we had zero interest rates with our quantitative easing (QE) policy. Around 2012 the same thing happened. This can happen towards the end of the long-term debt cycle. When interest rates are at zero the Fed has very little power in the QE policy. What does this mean? If the economy were to go down, the ability to deal with that by lowering interest rates and QE is very limited since interest rates are at zero already.
The fourth similarity is the rising of a world power.
In the 1930s, we have the powers of Japan and Germany rising up and challenging the dominant countries. Today we have China doing the same. China is almost as powerful as the US militarily and economically. In terms of Gross Domestic Product (GDP), they are catching up with the US. Until 2006, the gap in GDP between China and the US were increasing but have been decreasing ever since. The same thing happened in the 1930s with Japan and Germany as compared to the US and England. This economic rising and rivalry can be antagonistic and a threat to world peace.
Given that an economic downturn is likely, how do you prepare for the future? It would be very wise to prepare for this downturn and make sure you land on the right side of it. If you plan for it and prepare you can increase the chance you don’t lose 50 percent or more of your life savings or investment.
Be in control and adopt methods where you hold cash and limit your risk.
Disclaimer: The author is not a financial advisor and the following should not be taken as financial advice. This is by no means a complete discussion of the pros and cons of trading and/or investing. Please consult your own qualified advisors to determine what is appropriate and best suited to your specific investment objectives and risk tolerance.