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The 1929–1949 Secular Bear
Twenty years. Four cyclical bears. Three cyclical bulls. Zero real return.
By September 1929 the New York market had become its own weather system. Shoeshine boys traded on margin. A column by Roger Babson warning of a coming crash was dismissed as crankery. The twentieth century had taught Americans to believe, and the market had taught them to borrow.
What began that autumn was not a market event. It was the liquidation of the twentieth-century American bank. The S&P 500 would spend the next twenty years in a sideways corridor, cross through the Great Depression, a world war, and the opening of the Cold War, and finish where it had started. The investors who lived through it earned nothing real for their patience. But the recovery, when it came, began the longest and strongest secular bull market in American history.
A note on the ruler. We tell this story with the S&P 500, not the Dow Jones Industrial Average that filled the 1929 headlines. The S&P samples five hundred companies against the Dow’s thirty, a wider, more honest picture of the American economy, and the only common ruler that reaches continuously from 1929 to today. The S&P fell 86 percent in this bear; the narrower Dow fell closer to 90 percent. The same disaster, seen through different windows.
Numbered bands mark each cyclical phase; the sections below walk them in order. On measurement: we use the S&P 500 throughout this series rather than the Dow Jones Industrial Average. The S&P samples five hundred companies against the Dow’s thirty; it is the only common ruler that spans every secular era from 1929 to today.
1
▼ CYCLICAL BEAR
The Crash
Black Thursday was the warning. Black Tuesday was the end.
The 1920s had taught Americans a new kind of participation. Radio Corporation of America traded at 85 at the start of 1928 and 549 by its 1929 peak, a 546 percent run that had made middle-class owners rich on paper. General Electric went from 128 to 403 in the same window. Brokers lent against stock at ten percent down; shoeshine boys and streetcar motormen opened margin accounts. The Federal Reserve raised the discount rate from 3.5 percent to 5 percent through 1928 trying to slow the speculation, then to 6 percent on August 9, 1929. A Reserve Board warning memo in February had told member banks to stop lending for stock purchases; member banks ignored it. By September 3, 1929 the Dow stood at 381.17 and the S&P 500 at 31.86, and both numbers would be the high-water mark for a quarter century.
On Thursday October 24, 1929 the ticker fell behind. By midday the exchange floor was in a condition observers would later call frightened; it had never been there before. Richard Whitney, acting president of the Exchange, walked across the floor and bid 205 for ten thousand shares of U.S. Steel at the post, a theatrical attempt to stop the fall by the force of visible confidence. For an afternoon it worked; the S&P 500 closed down barely three percent. The weekend headlines called it a save. The weekend was wrong. On Monday October 28 the index gave back almost thirteen percent in a single session. On Tuesday October 29, Black Tuesday, the one the world remembers, it fell another ten percent on sixteen million shares, a volume record that would stand for decades. The ticker ran so late it did not finish printing until hours after the close.
Between 1930 and 1933 more than nine thousand American banks failed. Industrial production fell by half. One worker in four stood on a bread line. By the summer of 1932 General Electric had traded as low as 34, Radio Corporation of America as low as 10, the paper fortunes of the 1920s had become the paper losses of the 1930s. On June 1, 1932 the S&P 500 closed at 4.40, a number so small it reads today like a decimal error. The index had lost more than six-sevenths of its 1929 value. It would not reclaim its September 1929 peak until 1954, a wait longer than the career of a working man who had bought at the top.
In the summer of 1932 the one thing America needed was for someone to say the panic was over. One man was running for President on exactly that promise.
“Black Thursday was the warning. Black Tuesday was the end.”
2
▲ CYCLICAL BULL
The Hundred Days and After
The first great counter-rally of the long bear ran five years and quadrupled the index.
Between the June 1932 market low and FDR’s inauguration eight months later, the banking crisis entered its terminal phase. Hoover was a lame duck from November, Roosevelt refused to coordinate from his transition, and depositors watched. Michigan declared a statewide bank holiday on February 14, 1933; within three weeks every state had followed. On the morning of March 4, 1933, as FDR took the oath on the Capitol steps in a cold rain, there was no functioning banking system in the United States. There was no price for a dollar bill versus a dollar deposit. There was, essentially, no money.
By noon Saturday the inauguration was over. Within forty-eight hours Treasury Secretary William Woodin had drafted the Emergency Banking Act. Congress passed it on March 9 in a single day, without reading it, by voice vote. On March 12 Roosevelt broadcast the first fireside chat, telling fifty million listeners that the banks would reopen Monday and that it was safer to keep money in a reopened bank than under a mattress. On March 13 the sound banks opened their doors; deposits exceeded withdrawals three to one. The panic broke overnight.
The market understood what the vote of confidence meant. Over the next four years the S&P 500 more than quadrupled through the Hundred Days, the Civilian Conservation Corps planting trees by April, the Agricultural Adjustment Act plowing under cotton by May, the Tennessee Valley Authority damming rivers by June, then through the Social Security Act of 1935, the Wagner Act legalizing collective bargaining, the Works Progress Administration putting three million unemployed to work on roads and dams and theater productions. In the background Hitler reoccupied the Rhineland in March 1936, Italy invaded Ethiopia, Spain descended into civil war. The era of easy certainties was ending. The market did not yet know it.
By early 1937 the economy had recovered to within a step of its 1929 output. The President and his Treasury Secretary looked at the deficit and decided it was time to balance the budget.
“Deposits exceeded withdrawals three to one. The panic broke overnight.”
3
▼ CYCLICAL BEAR
The Roosevelt Recession
A self-inflicted wound inside a convalescent patient.
Not everyone agreed. Marriner Eccles, the Utah banker Roosevelt had put in charge of the Federal Reserve, warned that the economy was too weak to tighten and that reserve-requirement increases would strangle credit before unemployment had been cleared. He lost the argument inside the administration. Henry Morgenthau at Treasury, the Social Security actuaries, and the deficit hawks in Congress all wanted budget balance. A young English economist named John Maynard Keynes was writing letters to the President that FDR filed and did not answer. In the fall of 1937, after the market had already begun to fall, Keynes published an open letter in The New York Times warning Roosevelt that the recovery was being killed by its own doctors.
Confident the recovery was secure, Roosevelt had already turned to balancing the budget. The Treasury cut federal spending through 1936. The Federal Reserve, worried about inflation that did not exist, doubled bank reserve requirements between August 1936 and May 1937 in three successive moves. Social Security began withholding payroll taxes in January 1937, pulling two billion dollars out of consumer spending just as stimulus was being removed. The economy collapsed. Industrial production fell by roughly a third in nine months, the sharpest contraction of the entire Depression. Unemployment, which had fallen to fourteen percent, climbed back to nineteen. The S&P 500 lost nearly half its value in a single year.
The voters answered in November 1938. The Democrats lost seventy-two House seats and seven Senate seats, the worst midterm defeat of Roosevelt’s presidency. The conservative coalition of Republicans and Southern Democrats that would frustrate New Deal legislation for the next generation was born in that election. Marriner Eccles, who had been right, spent the rest of his career apologizing for a policy he had opposed. Keynes was eventually proven right too, but by then the lesson was being learned under circumstances no economist had argued for.
Roosevelt reversed course in April 1938. For seven months the rally that followed looked like the Depression was ending. It was not.
“A self-inflicted wound inside a convalescent patient.”
4
▲ CYCLICAL BULL
The False Dawn
Seven months. Sixty-two percent. Then Munich.
Roosevelt reversed course in April 1938. Three billion dollars flowed back into the Works Progress Administration, the Farm Security Administration, the Public Works Administration. The Fed quietly rolled back its reserve-requirement increases. Industrial production rebounded almost as fast as it had fallen. The market ran straight up through the summer.
In American public opinion, the European news read as someone else’s war. The America First Committee organized the following year would eventually count eight hundred thousand members and Charles Lindbergh among its spokesmen. In July 1938 the Evian Conference on Jewish refugees, called at Roosevelt’s suggestion, produced declarations of sympathy and no visas; thirty-two nations attended and only the Dominican Republic agreed to admit meaningful numbers. The Neutrality Acts, passed between 1935 and 1937, remained in force. A Gallup poll in September 1938 showed sixty-six percent of Americans opposing any involvement in European affairs.
Then the headlines returned. In September Hitler took the Sudetenland from Czechoslovakia at Munich while Neville Chamberlain promised peace in our time. On the night of November 9, Kristallnacht in Berlin burned the illusion down, seventy-four hundred shops smashed, over two hundred synagogues burned, thirty thousand Jewish men arrested for the crime of being Jewish. The American markets understood what Chamberlain had failed to understand at Munich: this was a government that would not stop. The 1938 rally ended that week.
From that November through the summer of 1942, every piece of news that arrived was worse than the last.
“On the night of November 9, Kristallnacht in Berlin burned the illusion down.”
5
▼ CYCLICAL BEAR
The War Descent
Three and a half years of absorbing one bad surprise after another.
Germany invaded Poland on September 1, 1939. France and Britain declared war two days later. For eight months there was no fighting, the “Phony War,” wrote reporters, and then on May 10, 1940, Germany struck west. Within six weeks the Netherlands, Belgium, Luxembourg, and France had surrendered or been overrun. Between May 26 and June 4, three hundred and thirty-eight thousand British and French soldiers were evacuated from the beaches at Dunkirk by a fleet that included fishing trawlers and pleasure yachts. Three days later Churchill rose in the Commons to say that if the British Empire lasted a thousand years, men would still say this was their finest hour. He was speaking to Britain. He was also speaking to Franklin Roosevelt.
The S&P 500 lost roughly a quarter of its value in the five weeks between Germany’s invasion of the Low Countries and the fall of Paris. In March 1941 Lend-Lease committed the United States to arming Britain against Germany without yet entering the war. Then on December 7 came Pearl Harbor; the market gave back another seven percent in the three trading sessions that followed. The low came in April 1942, four months after Pearl Harbor and two months before Midway, at an index level of 7.47.
Through the Blitz on London, through the fall of Singapore, through the Bataan Death March, through every piece of 1941-42 news that confirmed Axis dominance, American capital stayed in Treasury bonds, in cash, in gold hidden under floorboards. It was not in American industrial equities on the verge of mobilizing the greatest manufacturing effort in human history. Which turned out to be an expensive mistake. The companies that would build the planes, the ships, the tanks, the radars, and the bomb were sitting in April 1942 at valuations that would quintuple over the next four years. The war was being lost in the newspapers and won in the factories.
Investors who read the Wall Street Journal in April 1942 saw disaster. Investors who read the industrial trade press saw an unprecedented procurement cycle just beginning.
“The war was being lost in the newspapers and won in the factories.”
6
▲ CYCLICAL BULL
The War Boom
American industry built 300,000 aircraft, 86,000 tanks, 8,800 warships, and the atomic bomb.
Federal spending went from nine percent of GDP in 1940 to forty-two percent by 1945. Unemployment, which had been nineteen percent in 1938, hit 1.2 percent in 1944. Henry Kaiser’s Richmond shipyards learned to build a Liberty Ship in four days and fifteen hours. Ford’s Willow Run plant, at wartime peak, rolled out one B-24 Liberator every fifty-five minutes. By 1945 American industry had built 300,000 aircraft, 86,000 tanks, 8,800 warships, 2.4 million trucks, and the atomic bomb.
Behind the production numbers was a civilian economy under permanent regulation. The Office of Price Administration set the price of every consumer good from coffee to tires; sixty-five million Americans carried ration books. The Treasury sold 185 billion dollars of war bonds in eight drives, often on Hollywood tours, the actress Carole Lombard was flying back from a bond rally in Indianapolis when her plane crashed into a Nevada mountain in January 1942. Six million women entered the workforce; Rosie the Riveter was not a slogan but a payroll category. On June 22, 1944, two weeks after D-Day, Roosevelt signed the Servicemen’s Readjustment Act, the G.I. Bill, which would send 7.8 million veterans to college and build the postwar middle class before anyone understood that the postwar was going to happen.
The market bottomed in April 1942 and advanced relentlessly for four years through Midway, Guadalcanal, Normandy, Hiroshima, and V-J Day, past the formation of the United Nations and the opening of the International Monetary Fund. By May 1946 the S&P 500 had reached 19.25, its highest level since 1930. It had still not reclaimed September 1929. But the gap was closing, and the index would take only a few more years to finally cross it.
The war ended in August 1945. The economy that had organized itself around winning it now had to figure out what to do with twelve million demobilized soldiers and a Soviet Union that had stopped being an ally.
“The G.I. Bill built the postwar middle class before anyone understood that the postwar was going to happen.”
7
▼ CYCLICAL BEAR
The Cold War Opening
Peace was more disorderly than war.
Price controls lifted in 1946 and inflation hit fifteen percent. Twelve million demobilized servicemen flooded the labor market; organized labor struck for pay rises that would catch up with prices. Steel, coal, railroad, automobile, four and a half million workers were on strike at some point in 1946. Harry Truman seized the railroads in May to force the engineers back to work.
Underneath the strikes was a fear that the previous twenty years had earned: that the Depression was going to return the moment the government stopped spending. Economists at the Federal Reserve warned of a postwar unemployment rate of twelve percent. Automakers planned for a repeat of 1920. In the event none of it happened, pent-up consumer demand, G.I. Bill tuition, and the housing shortage absorbed demobilized labor almost as fast as it arrived, but the anxiety was real, and it kept household capital in Treasury bonds instead of stocks all the way through 1949. On April 15, 1947, Jackie Robinson walked onto Ebbets Field in a Brooklyn Dodgers uniform; forty-seven percent of Americans told pollsters that no Negro should play in the major leagues. Postwar America was and was not going to be a different country than wartime America.
Meanwhile Stalin kept the troops he had promised to withdraw. Churchill named the Iron Curtain at Fulton, Missouri in March 1946. The Truman Doctrine committed the United States in March 1947 to containing Soviet expansion wherever it appeared. The Marshall Plan offered thirteen billion dollars to rebuild Europe. The Berlin Blockade ran eleven months, American transport planes keeping two million West Berliners alive one tonne at a time, and ended on May 12, 1949. One month later the S&P 500 made its final low. The twenty-year secular bear was over.
June 13, 1949. From 13.55, the index would run uninterrupted for seventeen years and quintuple. The investors who stepped in on that June day were about to fund the single greatest expansion of middle-class wealth in American history.
“The twenty-year secular bear was over. The longest secular bull in American history was about to begin.”
Twenty years. Zero real return. One lesson that still matters.
Secular bear markets are not single events. They are long corridors of oscillation between hope and loss, inside which cyclical bull phases rally more than a hundred percent and die, and cyclical bears take back more than they should.
The 1929–1949 bear earned investors nothing in real terms across two decades. But those who understood the difference between the secular current and the cyclical weather, and who had capital available at the June 1932 low, the April 1942 low, or the June 1949 low, financed the next three generations of American wealth.
Understanding where you are in the long arc is not academic. It is everything.
The Postwar Golden Age
June 13, 1949. The S&P 500 closes at 13.55. The Berlin Blockade ends the next day. Twenty years of sideways grinding are over.
What begins the following morning will run seventeen years uninterrupted. The index will quintuple. Suburbia will spread from Levittown to San Jose. Factory wages will double in real terms. The Dow will cross 1,000 for the first time in history. And an entire generation of American investors, children of the Depression, will do the one thing their parents couldn’t: build wealth they can hand down.
How does a secular bull begin from the ashes of a twenty-year bear? Chapter two.
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