DJI – Ghost of the Great Depression
Dow Jones Industrial Average had been trading back in 1930s and its history provides a valuable picture of how expectation of economic crisis print uncertainty on the stock market. The Great Depression was characterized by an enormous amount of debt in the economy (over 100% of US GDP) and extreme levels of unemployment. The same parameters today cause high uncertainty of economic prosperity and growth of stock market in the nearest future.
There are a few similarities that we can identify by looking at the weekly charts of DJI today and DJI on the edge of1930s:
• First of all, there is a period of doubt where price volatility increases (red zone on the chart), which is then followed by the last push of the price to record the high point of the entire period.
• Secondly, a very sharp drop of asset price (49% in 1929 and 38% in 2020) which by itself signals that the prevailing trend is under threat.
• At last, just before the general consensus that the economy entered a recession, we see a strong retracement from the drop. In both cases, the price retraced back by a half or even a little more.
The pattern is repeating itself. Too much debt in the economy, unemployment rises, stock market crashes. Then it recovers because low prices attract investors, but over the next years people continuously sell their assets because it is their last cash reserve.
To conclude, it is not clear whether DJI and the stock market will collapse this or next week, but by the end of this year prices are definitely going to be significantly lower. Investing in stocks now is a fool’s game, it’s too late.
Stock prices cannot rally forever, especially when they're fueled by a large debt.
There are a few similarities that we can identify by looking at the weekly charts of DJI today and DJI on the edge of1930s:
• First of all, there is a period of doubt where price volatility increases (red zone on the chart), which is then followed by the last push of the price to record the high point of the entire period.
• Secondly, a very sharp drop of asset price (49% in 1929 and 38% in 2020) which by itself signals that the prevailing trend is under threat.
• At last, just before the general consensus that the economy entered a recession, we see a strong retracement from the drop. In both cases, the price retraced back by a half or even a little more.
The pattern is repeating itself. Too much debt in the economy, unemployment rises, stock market crashes. Then it recovers because low prices attract investors, but over the next years people continuously sell their assets because it is their last cash reserve.
To conclude, it is not clear whether DJI and the stock market will collapse this or next week, but by the end of this year prices are definitely going to be significantly lower. Investing in stocks now is a fool’s game, it’s too late.
Stock prices cannot rally forever, especially when they're fueled by a large debt.
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