Jim,
I agree that the fly in the ointment relative to 1973 is the interest rate situation in general and the actions of the FED in particular which are currently so completely different than they were then. The question is, what does that mean in the current domestic and worldwide economic/financial situation? In those days we were moving into a recessionary inflation which was thought to be an impossible contradiction in terms but became known as "stagflation" when the full impact hit. Now we seem to be facing at least the possibility of the first true deflation in 60 years. If that continues to develop either in real or financial assets, will moves by the FED have the same effect as in the past or will it eventually have the same effect as pushing on a string in getting banks to lend, borrowers to borrow, or investors to buy?
I certainly don't know but am concerned that with market valuations still historically high the markets may start focusing more on the availabilty of money than the cost of that money. To my layman's eye the quantity of money supply has been growing steadily this year already but borrowers have been experiencing credit problems anyway as lenders become more skittish about potential losses. It certainly is a positive to have the FED making moves, but just how positive?
For now it is difficult for me to ignore some parallels to the Aug.-Sept. 1973 rally. We had experienced a 21% selloff into July 1973, retraced 38% of the decline, then sold off again to a modest new low. We did not go to a new low here on the DJI but did on almost all other broad averages. Then, if my memory serves correctly, we had the surprise announcement by Nixon that price and wage controls were being imposed to "solve" the economic problems. They did not, of course, but the market exploded upwards in what became a 68% retracement of the full DJI selloff (about 60% on the S&P 500) over about a 10 week period. After that, as they say, the rest is history as we sold off 42% over the next 12 months in the major averages. At the moment we are now nearing a 50% retracement after a similar explosive reaction to a surprise announcment perceived to represent the solution to our problems.
I am certainly aware that markets seldom repeat exactly, but I fret that perhaps interest rate moves may also not repeat past experiences exactly. I wish I had been smart enough to grab this rally early on as several on this thread did, doing nothing at this point but selling bear mutual fund shares when the DJI refused to make a new low. However, I'm not as nimble as a lot of you folks and, although it looks to work on higher from here, I want this thing to play out a bit further before committing much equity money to it.
Bill |
