Sep

2

Oak TreeIn August, the stock market ended up, but with the interest rate vs. earnings yield differential at its all time high. Disruptive moves abounded. The Fed established a reversal in policy, cutting the discount rate. Through history, the average run of Fed moves in the same direction has been about eight. A 10% decline occurred in the S&P 500, and a 1000 point decline in the Dow, events unseen in five years. Some hedgefunds lost, some gained. Exchange margins were raised many times. In niche markets where the strong had ample capital, much fear was raised and many weak longs were washed out. Earnings continued apace, with some sectors down and others up — housing terrible, technology good.

Now the market can go its merry way with much less baggage. A nice replay of 1907, with a few actors changed. All this was brought to mind by the calmness and serenity of nature, exemplified by a few stately oak trees I saw at the Bronx Botanical Gardens today,  trees with their horizontal perimeter as great as their vertical, and many branches on each side, starting very low.

Ken Smith remarks:

Reading of charts indicates most years were good years for the stock market, in that regression to zero has never occurred for a major index. 1987 and 1998 took some percentage off the top, yes, but a recession of drastic dimensions did not occur. In an essay Causes of American Business Cycles, 1998, Temin claimed the only crashes that had a severe impact on the economy occurred in 1903 and 1929.


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