William Smead
Chief Executive Officer
Chief Investment Officer

Dear Clients and Prospective Clients:

Since the bottom of the stock market usually comes at the height of the economic or political calamity of that era I thought it would be good to review past major stock market low points. In this way we can compare our current misery with past misery since “Misery loves company”.

The bottom in July of 1932 at 41.22 on the Dow Jones Industrial average was one year shy of the end of the biggest economic contractions in U.S. history. The economy was contracting at more than 10% for its third year in a row. Unemployment skyrocketed to 20%, while 40% of U.S. banks failed. The average stock had fallen more than 80% in the prior two years and 8 months. Farm workers were thrown out of work and lost their homes because there was no other place to find work. The U.S. government was doing most of the lending through what was called the Reconstruction Finance Corporation.

The bottom of the stock market in April of 1942 came at 92.92 on the Dow Jones Industrial Average. Stocks had gone down for three years running from a 1939 peak of 155.92. We had surrendered Bataan to Japan, our U.S. Naval fleet was crippled at Pearl Harbor and the British had surrendered Singapore. The U.S. was woefully ill equipped to produce the war goods and armaments needed to fight the Germans and the Japanese all around the globe. Hitler was having his way everywhere in Continental Europe. Severe shortages of oil, rubber and other commodities made production slow and threatened us with runaway inflation. Most thought a depression would follow even if we won the war.

At the bottom on Dec. 6th, 1974 the Dow Jones Industrial Average was at 577.60 and the market had fallen 45% over two calendar years. The list of reasons to not invest in stocks sounded very familiar. Oil shortages and inflation psychology ruled the day. The banking system lacked liquidity. War was feared in the Middle East. Interest rates had soared to double digit rates. The President (Richard Nixon) had resigned in disgrace in August and the last helicopter to leave the U.S. Embassy from Vietnam in 1974 has been memorialized in the movie, “Good Morning Vietnam”.

The Dow Jones Industrial Average bottomed at 776.92 on August 12th, 1982. It was the fourth bear market since 1966 in a 16-year stretch. Unemployment was 10% and inflation had run at 10% or greater for the prior three years running. Heavy industry like timber, aluminum, steel, coal, automobiles and others were in a depression. Interest rates to “prime” borrowers peaked at 20% and mortgage rates peaked around 17%. Homebuilding was a disaster, even though millions of baby boomers were going to need homes soon. Foreclosed homes were for sale all over the Seattle area. Government deficits were expected to bankrupt us and major banks were teetering on extinction.

Here are the five-year gains coming off these prior major low points, not counting dividends:

July 1932-July 1937 — 41.22 to 182.00 Gain= 341%

April 1942-April 1947 — 92.92 to 175 Gain=88%

December 1974-December — 1979 577.6 to 830 Gain=44%

August 1982- August 1987 — 776.92 to 2500 Gain=222%

November 2008-November 2013 — Gain Unknown

Merry Christmas and Happy Holidays from all of us at Smead Capital Management!

William Smead

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