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Most of the Roaring ‘20s Were Anything But

Mark Hulbert says bulls who long for a ‘Roaring ‘20s’ recovery may not realize the ‘20s weren’t all that hot

Stock market bulls need to be careful what they wish for.

I’m referring to the “Roaring ‘20s” scenario that many bulls envision for the economy in general, and the stock market in particular, once the Covid-19 pandemic is largely behind us. These bulls are hearkening back to a century ago when, in the wake of the deadly 1918 influenza pandemic and World War I, the economy and stock market took off.

Or so the story goes. In fact, the economy and stock market struggled mightily for most of the 1920s. It was only in the last third of that decade that they even came close to roaring.

Consider first the economy. According to the National Bureau of Economic Research, the semi-official arbiter of when recessions begin and end in the U.S., there were no fewer than three recessions between 1920 and 1927: January 1920 through July 1921, May 1923 through July 1924, and October 1926 through November 1927. Nearly half of all months over that eight-year period -- 47%, to be exact -- were recession months.

In other words, the economy was contracting near half the time from 1920 through 1927. Who knew?

A similar story is told by the Dow Jones Industrial Average, as is shown in the accompanying chart. I constructed it to begin in mid-1919, since that is when the Spanish Flu pandemic’s third and final wave was considered over. As the chart shows, the DJIA in late 1924, five and one-half years later, was no higher than where it stood in mid-1919.

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The chart also contains a trendline that reflects constant 5.5% annualized growth from where the DJIA stood in mid-1919. I chose 5.5% annualized because that is the DJIA’s average annualized price-only return over its entire 120-year history. Notice that in mid-1927 the Dow was no higher than that trendline, which means that from mid-1919 up until mid-1927 the stock market was a below-average performer.

Hulbert Chart 022321

Getting History Right Is Important

It is important to take this walk down memory lane because the “Roaring 20s” scenario that the bulls currently are circulating otherwise appears to be quite compelling. It seems not just plausible, in fact, but quite probable that there is a huge amount of pent-up demand in the economy that will burst forth as soon as the pandemic-induced lockdowns are lifted.

On Real Money, Jim Cramer tells investors to not miss the train to Boom Town. But, he adds, be careful.

Bear in mind, however, that the stock market discounts the future and that, once an anticipated scenario comes to pass, the stock market will have long since reacted to it. This is the source of the age-old Wall Street wisdom to “buy the rumor, sell the news.” This is exactly what happened a century ago, after all: For the 12 months between mid-1918 and mid-1919, which encompassed the deadliest months of the Spanish Flu pandemic, the DJIA rose a stunning 29.4%. Once the pandemic was over, as the accompanying chart shows, the DJIA struggled.

There is a distinct possibility that a similar scenario could play itself out this time around as well. The stock market has gained more than 70% since last year’s Mar. 23 low, and it’s quite plausible that much of that gain is discounting the profits that corporations will earn when the pandemic lockdowns are lifted. If so, then the stock market has already discounted a Roaring 20s scenario -- leaving no extra upside potential once the pandemic is actually over.