Posts filed under “Markets”

Post Traumatic Crash Disorder & the 1962 Flash Crash

click for ginormous chart
1962b

Source: Bloomberg

On this day 53 years ago, Wall Street had one of its worst sessions ever. As the Wall Street Journal reported, “The Dow Jones Industrial Average fell 5.7%, down 34.95, the second-largest point decline then on record.” It was part of a longer decline that some called the “Kennedy Slide of 1962.”

Even though stocks had climbed for more than 15 years in the postwar rally, many investors were nervous that year. As LIFE magazine reported, the psychology underlying the 1962 retreat was still fixated on the crash of 1929: 

The glacial heights of the stock boom suddenly began to melt in a thaw of sell-off. More and more stocks went up for sale, with fewer and fewer takers at the asking price. Then suddenly, around lunchtime on Monday, May 28, the sell-off swelled to an avalanche. In one frenzied day in brokerage houses and stock exchanges across the U.S., stock values — glamor and blue-chip alike — took their sharpest drop since 1929. Memory of the great crash, and the depression that followed, has haunted America’s subconscious. Now, after all these years, was that nightmare to happen again?

It seems odd to blame the recency effect for a preoccupation with events 33 years earlier, but that’s what it was. The enormous impact of 1929 and the Great Depression had outsize and lasting effects that haunted investors decades later. It was still lurking even after the highs of 1929 were surpassed in 1954. Post traumatic crash disorder is the tendency to obsess over what happened in the past, and project it forward as the most likely future outcome.

Warren Buffett’s quote, “In the business world, the rear view mirror is always clearer than the windshield,” is even more applicable to investing. The adage that every general fights the last war comes to mind.

Not all market crashes are created equal, of course, nor are the reactions to them identical. In the mid-1990s, there seemed to be a very practical perspective to the stock market’s gains. Several years later, when the tech and dot-com bubble collapsed, there was almost a collective shrug of relief. Don’t get me wrong, trillions of dollars were lost, and lots of speculators were devastated. But the Nasdaq 100 Stock Index had returned 85 percent in 1998, and 102 percent in 1999, and was sporting a price-earnings ratio of more than 100. It didn’t come as a terrible surprise when things blew up. No one knew exactly when that crash was going to arrive, but it didn’t seem to be all that much of a surprise when it finally came.

Contrast that with the year before the 2008-09 crash: you could hardly find anyone who was willing to talk about derivatives, subprime mortgages or the imploding real-estate market. That was a surprise. Even though there seem to be lots of people now claiming that they saw it coming, in reality only a tiny cohort were specifically negative in late 2007.

I was reminded of this by Peter Boockvar, chief market analyst of the Lindsey Group, at a dinner last night. He was one of a dozenattendees, all of whom took turns waxing eloquent about the state of the economy, the stock market and the Federal Reserve. Boockvar mentioned the memory of when he and I had marveled after a television appearance about how rampantly bullish investors were at the time. There were very few bears in 2007. But today, you can find all manner of ursine company, from gold bugs and end-of-worlders to Fed haters and Hindenburg Omen devotees.

Hence, the psychological parallels I see now are to 1962, and the collective memory of the crash of 1929, rather than 2007 and the legacy of the dot-com bubble burst. There is a deep reluctance today to believe that the recession is over; to recognize that inflation is nowhere in sight; to admit that the market rally is more than just the result of Fed actions; to ignore positive economic data; and to disregard the huge recovery in corporate profits.

As Jason Zweig noted, the crash of 1962 is a reminder that “markets always have been messy and that investors’ morale always has been fragile.” And so it is today.

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Originally published at: Market Crashes Haunt Investors for Decades

 

 

Category: Markets, Psychology, Sentiment

S&P 500: 25 Largest Companies & their Cash Holdings

Click for ginormous graphic

Category: Markets

MiB: Dimensional Fund Advisors’ David Booth

This week, our Masters in Business radio podcast, we speak with David Booth, the founder, chairman and co-CEO of Dimensional Funds Advisors (DFA). At the University of Kansas, Booth earned his B.A. in economics and M.S. in business. He went to receive his MBA from University of Chicago Graduate School of Business, where he became the teaching assistant for future…Read More

Category: Markets

Top 10: Wall Street Sayings That Should Be Questioned

In honor and reverence to one of my favorite comedic personalities, David Letterman, and the end of his talk show career here is my own market Top 10 List.   Top 10 list of Wall Street sayings that should be questioned 10) There is a lot of cash on the sidelines. There is always a…Read More

Category: Humor, Markets, Really, really bad calls

Succinct Summations of Week’s Events 5.15.15

Succinct Summations week ending May 15th Positives: 1. The S&P 500 hit a new all-time high. 2. EU GDP rose 1% y/o/y. 3. NFIB small business optimism index rose to 96.9 4. Initial jobless claims came in at 264k, the 4-week moving average is the lowest it has been since April 2000. 5. Empire state…Read More

Category: Markets

Bargains Reside Beyond U.S. Borders

Source: BlackRock

Category: Markets, Valuation

Business Booms and Busts

Click to see a single chart of business booms and depressions since 1775. Source: HistoryShots InfoArt

Category: Cycles, Digital Media, Markets

Understanding Broad Trends Driving Stock Markets

Good to be back in the saddle after of a week of traveling in Silicon Valley, Napa and San Francisco. And I thought New York real estate prices were crazy. Whenever I am away, I like to ease back into the groove by reviewing some broad market and economic metrics. It isn’t that a lot…Read More

Category: Markets

Tren Griffin runs 25IQ, a blog about business models, investing, technology, and other aspects of life that he find interesting. He works for Microsoft; Previously he was a partner at Eagle River, a private equity firm established by Craig McCaw. ~~~ A Dozen Things I have Learned from Barry Ritholtz about Investing As part of my “A Dozen Things…Read More

Category: Apprenticed Investor, Investing, Markets

Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania David Card, Alan B. Krueger NBER Working Paper No. 4509 Issued in October 1993 NBER Program(s):   LS On April 1, 1992 New Jersey’s minimum wage increased from $4.25 to $5.05 per hour. To evaluate the impact of the law we…Read More

Category: Markets