The Dow Jones Industrial Index (DJIA) appreciated by 496% to 381 points on September 3, 1929 from the low of the decade at 63.9 in mid-1921 (almost a 6-fold increase). This is among the best returns ever in a decade timeframe. Could we be in for similar returns in the Roaring 20’s one hundred years later?
Dynamics leading into 1920
The world was coming off from World War I which was very expensive in both dollars and human tolls. Instead of increased taxes to pay for the war in the United States, the treasury printed more money. After the war, the Fed needed to raise interest rates to combat high inflation raising the Fed discount rate to as high as 7% - an all time high that held until the 1970s. At the same time, the “Spanish Flu of 1918” infected one-third (1/3) of the worldwide population killing an estimated 25-50 million people. In the United States, an estimated 675,000 citizens died. These dynamics combined to create a recession in early 1920s; one that dropped the Dow Jones index by nearly half to 63.90 points.
Boom Cycle of the 1920s
Several key factors were coming together in the early 1920’s - a perfect storm of good stuff - to make for positive economic times. The development of mass production (especially the motorized vehicle), electrification of America, and laissez-faire economic policy.
Henry Ford’s obsession with improvement of the production process for his automobiles transformed manufacturing industry. By taking out the bottlenecks, Ford was able to build cost effective automobiles available for the mass market. In 1918, only 1 in 13 families owned a car. By 1929, 4 out of 5 families had one. Because of this adoption, the country needed to build out an interstate highway network, gas stations, and other industries such as oil, rubber, glass, and steel all experienced a massive boom. Suburbs became a thing which drove construction projects both within and around cities.
Only one-third of households had electricity closing out the 1910’s; however, this grew substantially in the 1920’s to about 85% of households in cities (rural/farms were still behind until the mid-1930s). Availability of electricity made new inventions possible such as refrigerators, clothes washers, radios, vacuums, and many more.
President Harding reduced taxes, left interest rates low, and introduced protectionist policies such as tariffs on imports. Coolidge largely allowed these practices to continue throughout the rest of decade as it became know as “laissez-faire economics,” from the French meaning “let it be”. This hands-off approach to the economy allowed businesses to flourish and unemployment reached lows of 3.2%.
Want to see weekly updates from the papers in the 1920s? Found this weekly newsletter Roaring 20s by Tate He reads financial newspapers for the same week one hundred years earlier and reports out the news of the week.
Stock Market Crash of 1929
On Black Monday, October 28, 1929, the DJIA lost 13% and then another 12% on the next day, Black Tuesday, October 29, 1929. Over the next four years, the market finally bottomed out in July of 1932 after losing 89% from its highs in September of 1929. So what caused the crash?
Most agree that there was no one reason that caused the stock market crash of 1929, but a number of compounding factors. First, one article talked about Wall Street becoming a place of “unbridled speculation”. Everyone was zealously optimistic and buying stocks (overconfidence). Many were able to buy stocks on margin, meaning they paid only a small percentage (as low as 10%) of the value and borrowed the rest from a bank or broker. When everyone is leaning one way on a boat, it usually tips over.
In August 1929 – just weeks before the stock market crashed – the Federal Reserve Bank of New York raised the interest rate from 5 percent to 6 percent. This large increase curbed enthusiasm on the economy affecting market stability and sharply reduced economic growth.
Also during this timeframe, farmers were struggling to make an annual profit to keep their businesses afloat. This agricultural slump contributed to the financial climate of the country at the time.
Lastly, the crash led to an all out panic in the days afterward. People tried to take their money out of their bank accounts => bank runs. This led to massive bank failures and further deepened an already dire financial situation.
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100,000 Target for Dow Jones Industrial Index
How might this compare to the 20s decade of one hundred years later? If we were to experience the same 496% return from the low of 18,951 in March of 2020 by the end of 2029, the DJIA would hit 112,991. Holy cow!
Although the set up is not a perfect match to the decade of one hundred years ago, there are some similarities. Check out the comparison table of the two decades below.
One difference is that the market had a very nice run from 6,547 in early 2009 after the financial crisis to 29,568 in February of 2020, or a 351% increase.; versus a 15% increase between 1915 low and the 1921 low. Therefore, I cannot in good conscience predict 100,000 DJIA by the end of the decade, although I do believe that the market is not done in this cycle higher. A more reasonable target is another 50-75% higher from here, or roughly 50,000 to 60,000 DJIA. However, I believe we get there much earlier than 2029 as our bull run will not be able to last another 8 years. Perhaps the next major correction happens 2025 plus/minus a year or two.
Factors Contributing to High Growth
I get most of the cool charts and tables from the investor presentations of clean energy companies coming public through SPACs. Hyzon, a hydrogen mobility company focusing on trucks, showed what happens in nascent markets when cost is reduced drastically in their presentation.
The pandemic altered the world order and opened our eyes to alternative ways to get things done: meetings without travel (Zoom), remote doctor “visits” (Teledoc), and all of our groceries or restaurant orders delivered to our home (DoorDash, Instracart). Artificial intelligence software is becoming a reality and making business operations more efficient. Software plus robots to take on many of the tasks/jobs due to labor shortage, i.e. potential of drones for delivery. The promise of autonomous driving by the end of the decade to further reduce cost in shipping and transportation. There is no lack of new ideas and innovations in the Roaring 2020’s that will propel our economy, and stock prices, to new highs.
The annual revenue of the automotive manufacturers is about $1 trillion per year. The transition to the electrification of transportation will be a source for potential acceleration of market movement. According to the graph below (courtesy of the EVGO investor presentation), the US alone will experience a 32% compounded annual growth rate (CAGR) through 2027 of electric vehicles.
There is significant infrastructure needed to build out an electric vehicle economy. In addition to the electric vehicle itself, there are EV chargers, batteries, rare earth materials to make batteries, and lidar systems to guide the on board computer. There are also eVTOLs, electric vehicle take off and landing, that promise to change urban travel by transporting customers in the air (think electric helicopters). And all kinds of trucks from last mile delivery trucks to the heavy duty, long haul trucks. Hydrogen fuel cells are a promising technology for decarbonizing the large truck segment as well as airlines and ships.
Summary
We are back to the future in today’s Roaring 20s. The innovations in this decade will change the world in which we live and it will have an impact on public markets. I believe this bull cycle has gas left in the tank (or is it kilowatt-hours) to propel the markets to new all-time highs => as much as double from where we are today. In specific market sectors, such as my focus in Clean Energy and Sustainability, we will likely see 3-4x returns in aggregate. A well designed portfolio focused in high growth arena could yield 5x or more by the end of the decade - and that is our goal.
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This is for educational and entertainment purposes only. It should not be considered financial advice. See a financial advisor for investment advice.