One week the Dow is down 500 points. The next week it is up 500 points. The volatility is driving me nuts. I retired this year and soon I will be taking distributions from my 401(k) to supplement my retirement pension income. A hefty chunk of that 401(k) is still invested in stocks and mutual funds. And as expected, those assets grew nicely over the years – although much more erratically, if at all, during the decade just completed than during the preceding two decades. Well, if I am going to depend on those funds in the very near future, I need to decide whether to convert most or all of them to the relative safety of bonds and bond funds or the ‘complete safety’ of cash. Either way I would be sacrificing potential growth for asset preservation. It would be an easy decision if I knew what the stock market is going to do over the coming decade. Ha! I don’t know what it is going to do in the next five minutes, much less the next five years.
Being a rational creature, I look to history as a guide. Of course history never repeats itself exactly, but perhaps an examination of past analogs could be useful in guessing what is coming. The Dow today is below where it was a decade ago. During that decade it has been both 40% higher and 35% lower than where it is today. So the volatility has been with us for a while. Still, the fact that we have been at best treading water – and more correctly, sinking, if you take inflation into account – causes me to look for analogous decades in the past in order to consider what followed them.
Two obvious candidates come to mind: 1940 and 1980. In both of those years, the economy had just completed a miserable decade: high unemployment, recession or depression, flat or declining stock market, no consumer/investor confidence and massive government interference in the economy with deleterious consequences. What happened next? In the former, WWII; in the latter, Ronald Reagan. The history is well-known, so I won’t elaborate. The point is that anyone who failed to invest or reinvest in the stock market in 1940 or 1980 missed a fast-moving train that yielded enormous dividends over the next 20 years for those who got aboard.
So are we in an analogous position today? Should we be loading up on stocks and growth investments in anticipation of a boom decade following the lethargic decade just concluded? Alas, I fear not. Indeed, I suspect that we are not about to replicate the booms of the 40s and 50s or 80s and 90s. I worry that the correct analog for 2010 is not 1940, not 1980, but rather 1930, or more accurately 1932. Bush is Hoover and Obama is FDR. In exactly the way that Hoover used the Stock Market Crash of 1929 as an excuse to institute unwise, big government policies that undermined the roaring 20s prosperity of Harding/Coolidge, Bush used the panic of 2008 (although he had been at it long before that) to undermine supply side economics and 25 years of prosperity inaugurated by Reagan. Moreover, in the same way that Hoover was succeeded by FDR who doubled down on Hoover’s unwise policies, thereby subverting any chance of recovery and sentencing the US to a decade of depression, unemployment and economic stagnation, we have Bush followed by the even more misguided Obama who makes no secret of his aspiration to be another FDR.
I don’t know why the stock market is oscillating rather than just falling. True, the Dow is off nearly 1000 points from its April high. But I worry that the April high reflected more wishful thinking than a hard assessment of reality. Our President and the Democratic leaders of Congress are hard-left ideologues who are determined to crush entrepreneurs, promote crony capitalism and nationalize as much of our economy as they can. Their model is beyond FDR’s 1935 USA; rather they aspire to Atlee’s 1948 Britain, or Trudeau’s 1975 Canada or Mitterrand’s 1982 France. (Actually, in my darker moments, I think it’s really Castro’s 1965 Cuba or Chavez’ Venezuela today, which they really seek to emulate.)