Every investor's favorite topic, when you sit down to lunch, is whether it's going to be 1929 all over again.
In April, The Wall Street Journal ran a chart, neatly laying the Dow Jones Industrial Average of the 1980s over that of the 1920s. The similarity was eerie and made it appear that we're living in mid-1928. (The Crash began in late October 1929.)
Also generating talk about '29 is the length and strength of today's bull market.
Throughout this century, stocks have been tracing a regular, three-to-four-year cycle, measured from market low to market low. With one major exception, no cycle has ever exceeded four years, seven months, by the count of Anthony Tabell of Tabell's Market Letter, and today's rising market is almost four years old.
The one major exception to this regular cycle? The six-year bull market, running from 1923 to 1929, during which time the Dow leaped by 496 percent.
Except for the farm sector, the '20s also produced a long-running period of business growth, which makes comparison with the '80s even more compelling.
The good news, says Tabell, is that if the analogy holds true, we're probably not living in 1928, which would be near the end of the boom. More likely, it's 1926, which -- if history repeats itself -- would mean a further 147 percent rise in stock prices before the fall.
In this decade, stocks started up in August 1982 -- which Tabell matches to the '20s market low in August 1921. In both periods, stocks rose almost exactly 65 percent over the next 15 to 19 months. In both periods, there followed a hiatus of 13 to 16 months. In both periods, the second leg of the rise lasted at least 17 to 18 months (with the '80s rise still going on).
In the '20s, that second leg of the rise ended in February 1926, at the equivalent of what would be, today, a Dow of 2,000. There followed another hiatus of about a year, then a third, spectacular levitation to the '29 peak.
If today's Dow follows the same pattern, we're in for a flat to falling year, then a jump to 4,630 on the Dow. In other words, there would still be plenty of time for a plunger to make money.
Tabell says he doesn't mean to "remotely suggest the inevitability of a 1927-29 type of final blowoff and a similar consequent collapse." He's still betting on the four-year cycle, although this one may be a little longer than most of the others.
But the '20s do show that markets know how to keep on going up, no matter how many experts think they shouldn't. It is also interesting that even after the '29 crash, when the market dropped 48 percent over three months, prices still bottomed out at a higher level than they stood in 1926. Stocks recovered strongly in the following year.
It was the onset of Depression, not merely the wipeout of speculation, that -- by 1932 -- had taken stocks down to 10 percent of their former values.
All of which is an interesting history lesson, says Richard Russell of Dow Theory Letters, but absolutely immaterial to the market of today. He sees no merit in the parallels. In fact, his preferred analogy is to the market of 1943.
In that year, the ratio of advancing stocks to declining ones moved sharply higher -- heralding the great postwar bull market that, with a few interruptions, flew upward until 1965.
The ratio crashed between 1928 and 1932, Russell says. It fell again during most of the years from 1966 to 1974, then moved sideways until 1983. Since then, says Russell, it has been moving with great force.
His expectation? Some more tough years for businesses that are still wringing out the inflation of the 1970s. "But Wall Street," he says, "has a habit of doing what no one is prepared for and what no one is willing to believe."
To him, that means a market more like the late 1940s and early 1950s: a prolonged rise with only minor setbacks, when people can buy stocks and hold them safely for the long term.
Russell's cheerful prediction sure beats talk about 1929. But personally, when the Dow hits 4,629 I intend to sell.