Is Market Replaying Decade of the 1930s?

Commentary: March 2009 low might be analogous to July 1932's

Playing a script from the 1930s?

If we only could be so lucky ...

Some in the investment arena have been drawing analogies to the 1930s for several years now, of course. While such speculation died down somewhat when the market was behaving well in 2010 and early this year, it has returned with a gusto in recent weeks, owing to the stock market's extraordinary weakness — including another 3.5% decline on Thursday of this week alone for the Dow Jones Industrial Average (^DJI - News).

But drawing analogies is more of an art than a science, especially when you are picking and choosing from a decade like the 1930s. Contrary to the popular imagination, which regards that decade as one unremitting horror show, the 1930s actually contained one of U.S. history's most powerful bull markets.

So, depending on how you draw an analogy between today's market and the 1930s, you can paint either a very bullish or an extremely bearish picture.

Let's take a close look at the bull market that began on March 9, 2009. Through the market's high this past spring, the Dow had gained close to 100% in a little more than two years' time.

Is there any rally during the 1930s that comes close to being analogous? Some have suggested the one that began in November 1929, which basically was little more than a dead-cat bounce following the stock market crash in September and October of that year. But that rally lasted just five months, during which the Dow rose just 48%.

I admit that I'm not an expert in the analogy-drawing department, but that rally that began in late 1929 does not appear to be very analogous.

Another rally that is perhaps more comparable is the one that began in July 1932. It lasted nearly five years, and during it the Dow more than quadrupled.

The accompanying chart superimposes on that mid-1930s rally the Dow's progress from the March 9, 2009, low until now. Within the acceptable tolerances of analogy-drawing, I'd say the market over the last two and one-half years is not that far off.

And, if this is the script the market is indeed playing out, a huge rally is in store over the next couple of years.

Is this analogy-drawing little more than shameless data mining? Probably not. I engage in it for this column simply to counter those who, equally shamelessly, try drawing their own analogies to the 1930s in order to reach bearish conclusions.

From a contrarian perspective, however, the analogies to that decade that the bears love to draw do have significance. It indicates just how robust is the wall of worry that advisers choose to draw an analogy to the very worst of the 1930s — when they just as easily could do so in another way and reach a quite bullish conclusion.

And, as we all know, bull markets like to climb a wall of worry.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.