Aftermath of Market Break Finds Investors in Quandary
A. W. BLUEJanuary11930
Aftermath of Market Break Finds Investors in Quandary
BUSINESS & INVESTMENTS
Hundreds of thousands of dollars are lost annually in Canada through careless investment. Fraudulent and worthless securities are being constantly poured on to the market to trap the unwary. A general observance of this simple maxim will assist in the reduction and elimination of this economic waste— “BEFORE YOU INVEST—INVESTIGATE”
A. W. BLUE
WHAT has the stock market in store for 1930? Will those who suffered serious financial loss in the recent market collapse have an opportunity of recouping their fallen fortunes, or is the speculators’ paradise definitely over? There are many who are searching eagerly for an answer to these queries, and there are many others, rampant speculators not so long ago, who are permanently “cured,” and from now on will be content to guide their financial barks into the comparatively peaceful waters of the bond market.
As the threshold of a new year is a conventional occasion for mental reflection, it may be worth while to pause and examine the events and causes leading up to the recent debacle—memories of which still linger painfully in the mind—and consider the present and immediate future for some light that will enable the reader to form some theory on pending financial movements, and so frame his policies accordingly.
Of course the market’s setback was merely the collapse of another boom— a stock market or speculators’ boom. Prices were carried so high, and all reasonable business expectations had been so far overdiscounted, that there was little ammunition left to carry stock still higher. But it had appeared to many astute observers for the past two or three years that the market had reached a stage where it was looking so far into the future that its vision was dimmed by the very remoteness and uncertainty of the prospect. But in the face of gloomy forebodings the market still maintained its dizzy pace—until the end of October, when the dream of sudden and enduring wealth was ended for many.
What Caused the Collapse
TANE of the best summaries of the underlying causes that led to the break of the New York stock market, and as a matter of sequence to the drastic recession of values on Canadian markets as well, is contained in the official bulletin of the Guaranty Trust Company, New York. It says in part: “To suppose that the selling wave of the last few weeks was due to adverse developments of corresponding importance in the general business situation would be a fundamental error.
“A number of factors combined to produce the unprecedented depreciation in stock prices that brought about the corrective action of the market. One, of course, was the truly fine progress of the nation’s leading business concerns, which fully justified a strong upward trend in stock values. But this perfectly normal movement was immensely exaggerated by the changed character of the investing public. To borrow a popular phrase of the day it may be said that we have become ‘investment-minded,’ partly as a result of the wide buying of government securities during the war and partly by reason of the diffusion of income in the last decade,
which has enabled vast numbers of people to enter the investment field on their own account for the first time. Security dealers were quick to take advantage of this change by establishing offices in cities and towns throughout the country. These offices in turn attracted thousands of inexperienced persons into the ranks of stock-market speculators, where neither their financial knowledge nor financial strength entitled them to be.
“Thus, the public that has to a considerable extent determined the course of the stock market in the last few years is a public uninformed as to intelligent procedure in buying and selling securities. It was easily subjected to psychological reactions of an exaggerated sort, buying and selling en masse without any clear understanding of the reasons for doing so. Although there has always been an element of mob psychology in the actions of the investing public, this element has been increased manifold by the changes of recent years.
“The small investor is to a large extent the victim of his own imagination. His attitude toward the market seems to have been based on the view that there was no limit to the process of increasing earnings, reinvesting the profits, and thus still further increasing earnings.
“When realization finally came that prices of many securities were out of all proportion to present and prospective earning power the reaction was similarly exaggerated. Not only did the fear of loss impel a rush of liquidation, but the disorder was increased by the fact that innumerable small speculators, unable to supplement their impaired margins, were precipitated into the market as sellers against their own will. Just as the efforts of the public to make the most of the rising prices result in a buying wave that pushes values too high, so the fear of loss forces a reaction that inevitably depresses the prices of stocks below their true worth.”
Is This a Bear Market?
' I 'HE end of the greatest speculative
boom in history was accompanied by developments equally spectacular. Losses on this continent ran into several billions of dollars. Thousands have been wiped out financially, and countless individuals have had their financial resources greatly depleted. A cynic recently observed that a new social order had arisen—the nouveau pauvre. What has all this to do with the market outlook? With prices now down to bargain levels compared with formerly existing highs, is there any justification for those who still have money to step in and buy to the limit of their resources in hope that the market will immediately start upward again? One has to reckon with general business in this connection. Has the business outlook been altered by the slump in security prices, and to what extent? Logically, business will be adversely affected; how far cannot be presently determined. The purchasing power of the public has been greatly reduced. A technical rally is one thing and a sustained rise is another. No market ever goes straight in one direction, either up or down. It has its advances and declines; in a bull market the extent of the advances exceeds the declines, and in a bear market every advance may be succeeded by a decline of even greater proportions, such a procedure carrying the general level of prices definitely lower over a period of time.
Are we in a bear market, a declining market? There does not appear any logical basis for argument on this point. We are in a bear market, or on the outer fringe of one, at least. How long have preceding bear markets lasted?—the records show anywhere from six months to two years, seldom less The downward trend in New York began in the month of September, and, as this is written, has been under way for two months and a half. It has accomplished more, it is true, in the way of depreciating stock values in this comparatively short space of time than other bear markets have accomplished in a year. For instance, to date the averages of representative New York stocks are down forty-five per cent from their high points, this decline materializing in two months and a half and breaking all precedents. It took twenty-one months, from November, 1S19, to August, 1921, for the market to accomplish a forty-six per cent break. The 1917 bear market in New York traversed thirteen months and consumed forty per cent of values. In the great pre-war bear market which lasted from January 19, 1906, to November 15, 1907, the loss was forty-six per cent, and an equal loss of forty-six per cent was suffered in the downward movement from June 17, 1901, to November 9, 1903.
It is apparent, therefore, that the current recession approximates the extreme declines of former bear markets, but it is perhaps unsafe to conclude that this limits the extent of the decline in the present instance, as stock prices in the recent heyday attained very much higher levels than at any preceding time. This applied to Canadian markets as well as to Wall Street.
There is another way of looking at the picture, too. The average yield of New York stocks used in the “averages” was 5 Yi per cent when the market was at its low point. While a comparison may be pointless, it is nevertheless interesting to observe that at the extreme low of the 1920 reactionary market the industrials were yielding 9 Y per cent, and in the 1907 slump the yield at the low point of the market was nine per cent. Conditions now and then with regard to conventional security yields are of course very different. The figures, however, show to what limits an extreme bear market can run.
The Business Situation
rT"'HE stock market usually discounts
business tendencies, and at present is discounting a reversal. At the commencement of the break it was evident that some lines were not shaping up',tothe[standards of the past two or three years, particularly automobiles. The light wheat crop, tight money, and the tie-up of grain at the terminal ports were high lights of the Canadian economic situation, which adversely influenced sentiment. To what further extent business will be affected as a result of losses suffered in the stock market remains to be seen. A. E. Phipps, former head of the Canadian Bankers Association, declared at the annual meeting of that body a few weeks ago that “it looks to me as if the period of expansion has temporarily, at least, passed the peak. ”
One thing appears certain—namely, that judgments toward stocks have been drastically revised. Yield and actual earnings are the yardsticks of measurement, rather than possibilities one, two and three years hence. Earnings will be subjected to critical examination, and a stock that is still selling at twenty to
twenty-five times its earnings—and these are becoming scarce—is viewed with a certain suspicion. Speculative sentiment has sobered up. Stocks selling in hopes and romance may be expected to adjust themselves more nearly to old-fashioned standards. A decade ago it was customary to expect a gilt-edged bond to yield around five per cent, a high-grade preferred stock from 53/2 to 6 Y per cent or higher, and common stocks from seven to eight per cent. But at the crest of the boom period, while the senior issues sold on this price standard, leading common stocks sold down to a two and three per cent yield basis; so persistent was the demand for this type of security in the belief that they would continue to advance forever.
The break in the market bore stocks down to a point where the yield is measurably improved, but still some distance removed from conventional standards. Whether the speculative public shorn of illusions, will express itself as content with the present situation and yield of stocks, and buy in sufficient volume to sustain or even advance the market, or will await still further recessions and higher yields, remains to be seen. Either of these situations is possible, the course of business being the governing factor.
The Effect on Credit
fANE of the most cheerful aspects of ^ the whole situation is the radical correction that has been effected in the money market. Credit is now easy, or at least much easier than it was. The heavy tie-up of wheat, of course, entails a large amount of credit, which affects the Canadian situation, but the successive reductions of the bank rate at New York, and the lowering of the Bank of England rate and official rates elsewhere, are concrete evidence of the passing of a strain that was not long ago an acute question in business.
This easing of money will have an important bearing on the bond market as well. It will afford an opportunity for bond prices to rise, assisted by the heavy purchases of bonds by banks, and by private individuals who are going to make sure that a remnant of their capital at least will remain intact, no matter what vicissitudes they may encounter elsewhere. There may be some selling of bonds by investors who want to participate in the speculative possibilities of the stock market, but this selling will be offset by purchases on the part of a very large fraternity which now for the first time fully appreciates the hazards of stock speculation.
For the present at least, the star of the bond market is in the ascendant.
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