Opinion: Stock Investors Can Only Hope Post-COVID 2020s Aren’t Like the ‘Crazy 20s’

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Market forecasters are increasingly touting the boom times they expect to come as the US economy emerges from the COVID-19 pandemic. A century ago, Americans were emerging not just from the Spanish flu pandemic but from World War I. never-before-seen heights … We can only hope that the US stock market in the 2020s looks nothing like what it was in the ‘roaring 20s’.

Unfortunately, this is another case where our historical memories are unreliable. The stock market in the 1920s didn’t really produce an above-average return until the second half of the decade. The first half contained not just one, but two economic downturns and plummeting corporate profits. The chart below shows the picture. It begins in mid-1919, which is approximately when the third and final wave of the Spanish flu pandemic ended. Notice that between that time and the middle of the next decade, half the time will be spent in recession. At the end of 1924, the S&P 500 SPX, + 1.18%, as well as earnings per share, were not higher than they were in mid-1919.

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If the next few years followed the same script, the S&P 500 in late 2024 would trade at about 3,000, or 25% below current levels. Meanwhile, earnings per share for the S&P 500 over the past 12 months would total around $ 135, roughly 14% below current estimates for the 2021 calendar. Clearly, the bulls need to find a better analogy. Particularly chilling is the behavior of the Consumer Price Index in the early 1920s. Although it closed 1924 more or less at the same level as in mid-1919, observe in the graph its alarming increase in the 12 months after the end of the third wave of the Spanish flu pandemic. During this period, inflation remained at an annual rate of over 20%. This experience is perhaps relevant today, as inflation expectations have risen markedly in recent months and investors wonder if the rise is just a temporary flash or the start of a longer-term trend. Certainly few, if any, are now suggesting that inflation could rise to 20% or more in the next two years. To argue that this will not be the case, the analogy with the 1920s loses credibility. Getting the story right is important Getting the story right is important, because even if the story doesn’t repeat itself, it rhymes. But if our reading of history is as bad as that of those who today go back to the roaring 20s of a century ago, we cannot expect the future to even rhyme with the past. We might as well flip a coin. The lesson I draw from my analysis of the 1920s is that Wall Street buys the rumor and sells the news. The stock market exploded in late 1918 and the first half of 1919, when more and more investors “bought into the rumor” that the end of the pandemic was imminent. That left relatively little upside potential for the stock market when the end finally came, so investors “sold the news.” It is quite plausible that we are playing around with that scenario today. The stock market has exploded over the past year as successful vaccines were created, mass produced, and then delivered. The Nasdaq Composite COMP, + 1.76% has nearly doubled from its March 2020 low, while the S&P 500 is up close to 80% on a dividend-adjusted basis. It would be entirely consistent with a true 1920s scenario for the economy and the stock market to suffer once the pandemic was actually declared over. Mark Hulbert is a regular contributor to MarketWatch. Your Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com More: Stock market sentiment ‘increasingly euphoric’ about to send a ‘sell’ signal Plus: Will individual investors stick around after the surge in stock trading? pandemic?