Market Hits New Highs! Time for a Sobriety Test?

The Dow and the S&P are setting record highs.

Even NASDAQ is halfway back to its 2000 high of 5100+.

That's not exactly good news for wealth managers who seek new business.

When investing seems easy, investors don't get queasy. Thus they 're less inclined to seek professional help.

Not to worry. On Wall Street every rampage of the bulls is followed, sooner or later, by party time for the bears.

Need a refresher course on those parties? Read a few excerpts from this John Steele Gordon column in the American Heritage archives:

The Great Crash
[W]hile there are now relatively few who personally remember the Crash of ’29, it has become an ineradicable part of the American folk memory. For while it did not cause it, the Crash happened at the very beginning of what soon became the deepest economic depression the modern world has known. By the time the Dow finally hit bottom in 1933, it was barely one-tenth of what it had been less than four years earlier, and virtually where it had been on January 1, 1900. The capital gains of a third of a century had been wiped out.

The forgotten sequel
The bull market of the early 1980s … while it ended in a similar great crash, on October 19, 1987, was followed by something completely different. The Federal Reserve, having learned the lessons of 1929, acted immediately to ensure liquidity in the market, preventing the crash from feeding on itself. As a result, the uproar on Wall Street did not greatly affect the American economy as a whole. Indeed, the market almost immediately began to climb again, and today … the crash of ’87 is hardly remembered at all.

The terrible slow motion crash
[I]f you look at a chart of the Dow Jones from the mid-sixties to the early eighties, its apparent stagnation was, in some ways, only apparent.…

Lurking within it, hidden by inflation, was one of the worst bear markets in Wall Street history. By the fall of 1973 the “three I’s”—inflation, interest rates, and impeachment—were increasingly worrisome. When the oil embargo caused long lines at gas stations, the market, dropping day by day rather than all at once, lost fully 20 percent of its value between October 26 and December 12.

The next year was even worse. While the gross national product declined by 2 percent in a modest recession, inflation roared ahead at 12 percent. People abandoned the stock market in droves. Thirty percent of American families owned stock in 1970, while only 21 percent did in 1973. New forms of investment, such as money market funds, attracted investors away from Wall Street. With ever-rising interest rates, they were paying 8 to 9 percent, compounded daily, and were much safer than stocks.

As a result stocks sank another 24 percent in 1974. In two years the market capitalization of New York Stock Exchange issues lost almost 50 percent of its value. But had it not been for the galloping inflation those years (around 12 percent in 1973 and 1974) the damage would have been far worse: a drop of more than two-thirds. Not as bad as 1929–33, but still, by a wide margin, the second worse bear market of the twentieth century.

A moderate bear market should be good for the wealth management business. A crash of 1973-74 proportions is another story.

Following that "second worst bear market" we heard bank after bank telling of trust or investment customers who swore they would never buy stocks again. Never!

Even in the mid-1980's, some trust officers felt the crash was still too painful a subject to mention in public.