Barron's weighs in with some historical perspectives (not great, but another view):
interactive.wsj.com
Going to Extremes Both on the upside and downside, Wall Street has a flair for it By Robert Sobel
Investors ceaselessly search for methods to determine where stock prices
are headed and where (and whether) to invest. Some study history, hoping to
uncover useful lessons. Unfortunately, just about anything can be proven if
one selects the right episodes. Throughout much of the 'Nineties, bears have
been arguing that, by historic standards, shares are extraordinarily overvalued.
But history also demonstrates that exciting new technologies, such as the
Internet, often have sparked major sweeps upward. So, the bulls talk of a
"new paradigm" and deem old rules and old benchmarks irrelevant.
Thus, today's investors must deal with the issue of whether a host of unproven
young companies merit mile-high stock-market valuations that have surged
past even the most outrageously bullish evaluations of their prospects. This is
the mirror image of a puzzle that investors faced in the 'Thirties and 'Forties.
Back then, the issue was whether profitable blue-chip firms really deserved
depressed prices that lagged even the most bearish forecasts of their futures.
Different backdrops, same question: How can one justify stock prices so out
of sync with the probable economic and financial realities?
One big and quite understandable difference between the two eras: The bull
market of the 'Nineties has seen investors rush into the market. The bear
market of the 'Thirties and 'Forties saw them shun Wall Street.
Stock-market volume for all of 1932 came to 425 million shares, an ordinary
day's worth of trading today. The ticker would remain silent for a
quarter-hour at a time, and it took only 80,000 shares to make the
most-active list. The bottom came in 1942, during which only 126 million
shares changed hands.
This naturally had a devastating impact on employment on Wall Street.
Although well-publicized layoffs over the past year have led to worries about
what will happen when the bull finally departs, it would take a very fertile
imagination to envision anything like what occurred throughout the
financial-services sector in the two decades after the Crash.
In 1940, only 5,855 people worked in the financial district -- versus about
125,000 in 1929. By 1946, the labor force had shrunk even further, to 4,343.
No one wanted a Wall Street career.
In 1928, 17% of
Harvard's business
school graduates had
found employment in the
securities and banking
industries. In 1942, the
figure was 2%. During
those years, most of the
talented bankers,
brokers and traders fled
to other occupations,
and when the U.S.
entered World War II,
others departed for
government jobs or service in the Armed Forces. "When the Crash came in
the 'Thirties, no banker would admit where he worked," Citibank's former
CEO, Walter Wriston, once recalled. "Nobody wanted to work for a bank
from 1933 to 1939. Then, the war started. So there was nobody coming into
the business from 1933 to 1946."
The lack of business led to a decline in the price of NYSE seats -- one
changed hands at $17,000 in 1942. Experienced commission brokers were
drawing $35 a week -- far from a princely sum, even by the standards of the
day. Blue-blooded investment bankers were holding down night jobs as
salesmen in department stores, while brown-bagging their workplace meals.
The days of eating in a posh company dining room were over, replaced by
lunch hours spent eating tuna sandwiches at a desk.
The market performed dismally during World War II. On December 6, the
day prior to the Japanese attack on Pearl Harbor, the Dow closed at 117,
and on Monday it fell to 115 and continued downward. At war's end the
index was only at 147, even though the American economy had doubled in
size and corporate profits were more than 250% above their 1929 levels.
Cast yourself back to that period and try to understand the languor and
pessimism on Wall Street. Would you have invested in such stocks as
Lockheed, Douglas, General Motors and others involved in the arms
program? Or would you have concluded that while revenues might rise, there
was bound to be profitless prosperity, given the anti-business proclivities of so
many New Dealers? For most, the latter scenario seemed more plausible.
This situation continued after the war, when many economists predicted a
depression once military orders were canceled. In May 1949, the
unemployment rate was above 6%; almost twice as many Americans were
out of work than had been a year earlier. One survey indicated that more than
40% of the public thought another depression was on the way.
The few investors still around were cautious. In 1949, the five
best-performing stock groups were leathers, utility holding companies,
papers, soaps and ethical drugs-groups that paid good dividends and had
stable earnings. Just as today's investors shake off poor earnings and dream
of a golden future, those of the post-World War II era wanted safety and
ignored signs of an economic boom in the making.
And one was in the making, exemplified by the rapid growth of television. In
1946, just 10,000 TV sets had been manufactured. Three million were sold in
1949 and more than 7.5 million in 1950. Motorola's sales rose from $23
million in 1946 to $82 million in '49, while net income jumped from $620,000
to $5.3 million. A host of other companies, from Admiral to Zenith to GE to
RCA, posted similar results. But their stocks languished. As late as 1950, the
Dow's P/E ratio stood at 7.0, lower than it had been at any time in the 1920s
or 1930s.
This dismal situation couldn't last forever. In time, shriveled hopes were
replaced by the high expectations of the new consumer culture. During the
immediate post-war period, it was sometimes argued that prosperity would
be short-lived. Such no longer was the case by the early 1950s, which was
when investors started trickling back to their brokers. Stock prices started to
rise, and by mid-decade, the nation was involved in the first of several major
bull markets, which today's investors would find quite familiar.
As the 'Fifties wore on, investors were prepared to pay a higher price for
glamour. In the bull market that followed, such issues as Texas Instruments
and Xerox sported P/E ratios of more than 50. Just as 1930s and 1940s
investors had been overly pessimistic, so those of the 1950s appeared to
discount not only the future, but the hereafter as well. Does this sound
familiar?
Had you purchased shares in some companies like these, you would have
reason to celebrate today. But how about others, such as Aerojet General,
Itek, Ampex, Fairchild Camera and American Photocopy, some of the
forgotten glamour stocks of close to half a century ago? You don't have to go
back that far. How many of the biotech stocks of a decade ago are still
attractive? Perpetual youth isn't a gift given to mankind -- or to stocks.
The lesson: The market goes to extremes -- both on the downside and upside
-- but has a nasty habit of eventually steering itself back toward rationality.
That's something that today's intrepid Internet investors might do well to
remember.
ROBERT SOBEL is professor emeritus of business history at Hofstra
University, senior fellow at the Milken Institute and author of The New Game
on Wall Street. |
