This Time It’s Different – II

Recently I posted an article, titled “This Time It’s Different”. Most people when asked about the idea of investing in the market, have responded that “They are waiting to see what happens” and yes, “This Time It’s Different because…..”

If you read my previous article, “This Time It’s Different”, I referred to a study done by Hartford on the Recession of the mid 1970’s (1973 & 1974), arguably the closest parallel to our present economic situation.  The low point in the market was Sept. 30, 1974. The Dow closed at 607.87 (not a misprint) This was down more than 40% from its high in 1972, when it crossed the 1000 mark for the first time.×4124348 The stock market had gone through back-to-back negative years for the first time since the Great Depression.

We should set the stage a bit at this point. In 1972, we were still heavily involved in the Vietnam War, which was highly unpopular, and dragged on for several years.  Also, in 1972,  the Watergate scandal began. This resulted in the indictment and conviction of several of Nixon’s closest advisors, and ultimately in the resignation of the President himself, on August 9, 1974. 

To make matters worse, the Oil Embargo was put into effect by OPEC, which refused to ship oil to the US due to their support of Israel at that time. Unemployment had reached a high of 6.7% in 1974. 

So things in 1974 looked pretty bleak. I recently read a letter written by Jim Fullerton of the Capital Group to shareholders at that time(November 1974).  Here are some highlights from Mr. Fullerton’s letter.

“Each economic, market, and financial crisis is different from previous ones. But in their very difference, there is commonality….. Today there  are thoughtful, experienced, respected, economists, bankers, investors, and businessmen who can (tell) you why this time the economic problems are different; why this time things are going to get even worse – and hence, why this is NOT a good time to invest in common stocks, even though they may appear low…..This time is a whole new ball game.”

“In 1942 everybody knew it was a whole new ball game…..The Germans had overrun France. The British had been thrown out of Dunkirk. The Pacific Fleet had been disastrously crippled at Pearl Harbor. We had surrendered Bataan, and the British had surrendered Singapore. The U.S. was so ill-prepared for a war that……75% of our field artillery was equipped with horse-drawn, French 75mm guns.” (Mr. Fullerton served in WWII.)   

“In April 1942, inflation was rampant…..On April 8, 1942, the lead article in the (Wall Street) Journal was: ‘Home Construction, Total far behind last year’s. Private Builders hardest hit.’…..Washington D.C. also considered more drastic rationing with price fixing, or still higher taxes as a means of filling the ‘inflationary gap’ between increased public buying power and the diminishing supply of consumer goods.”

“A leading stock market commentator wrote: ‘The market remains in the dark as to just what it has to discount. And as yet, the signs are still lacking that the market has reached permanently solid ground for a sustained reversal.”

“Yet on April 28, 1942, in that gloomy environment, in the midst of a war we were losing, faced with excess-profits taxes and wage and price controls, shortages of gasoline and rubber…..and with the virtual certainty…..that once the war was over, we’d face a post-war depression, the market turned around.”

“Now I’d like to close with this: ‘Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished. In fact, does anyone think that today’s prices will prevail once full confidence has been restored?’ That comment was made by Dean Witter in May of 1932 – only a few weeks before the end of the worst bear market in history.”

“Have Courage! We have been here before – and we’ve survived and prospered.”

Jim Fullerton

As of today, July 23, 2009, the Dow is up nearly 200 points, crossing the 9000 mark for the first time this year. This is a gain of over 38% from its low point of 6547 on March 9, 2009. Yes, This Time It’s Different.

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