January 22nd, 2010
About the only advantage of getting older is seeing the extent to which history repeats itself. Take, for example, Obama’s “chastising big Wall Street banks yesterday, January 21, urgently calling for limits on their size and investments to stave off a new economic meltdown.” According to Obama, “We have to get this done. If these folks want a fight, it’s a fight I’m ready to have.”
These fighting words reminded me of a similar speech made by another young, democratic President in March 1962. I had looked at my first chart and bought my first shares right around then, almost 48 years ago. Here’s some background (from Encyclopedia.com):
“Early in 1962, the contract between the United Steel Workers and the steel companies was about to expire, and the administration wanted to avoid a prolonged strike, like the 116-day strike that had accompanied negotiations over the previous contract in 1959. The administration also wanted to avoid a hike in the price of steel. On 23 January 1962 Kennedy; Labor Secretary Arthur Goldberg; Roger Blough, President of U.S. Steel Corporation; and David McDonald, President of the United Steel Workers, met secretly and worked out a wage agreement that was within the CEA guidelines. On 31 March the union and U.S. Steel formalized a new contract that added marginally to fringe benefits and increased wages by ten cents per hour—the smallest increase since 1942. On 10 April Blough met with Kennedy and Goldberg and informed them that U.S. Steel would raise prices across the board by six dollars per ton—a 3.5 percent price increase. Goldberg reacted sharply and accused Blough of violating the January agreement.
That same day several other major steel companies announced an identical price hike. At a press conference on 11 April Kennedy assailed the price hike as unpatriotic and against the national interest. Immediately, the Defense Department announced that it would buy steel only from those companies that held prices down. The Justice Department began an investigation of price-fixing in the steel industry, sending the FBI to Pittsburgh to begin an immediate investigation, and Congress announced that hearings would be held to investigate monopolistic practices in the steel industry. In the face of adverse publicity and government pressure, steel-industry leaders announced on 13 April that they would rescind their price increases. A year later a federal grand jury indicted executives from U.S. Steel and six other steel companies on charges of illegal price-fixing. The immediate cost to the administration was a breach with the business community that took months to heal.”
And what was the price of this confrontation between the Administration and a key sector (when manufacturing was a larger portion of the economy) on the stock market? From the day of the news conference to June 26, just two months later, the market suffered a mini-crash of 22.9%:
The economy was in trouble in Kennedy’s first year in office and the stimulus program of increases in minimum wages, unemployment compensation, Social Security benefits, area redevelopment, vocational training, job training and other measures were not bringing the desired results quickly enough. The steel negotiations came at the beginning of his second year.
After the “jaw-boning crash”, Kennedy reversed course, becoming convinced the economy needed the additional stimulation that could be provided through a tax cut.
“Kennedy used his commencement address at Yale University to reach out to the business community, suggesting that business needed the tax relief that would be provided by liberalizing the depreciation allowance on new plants and equipment and by giving business a 7 percent investment tax credit. These proposals became law on 16 October 1962.”
When inaugurated, Obama and Michele were viewed by many as the reincarnation of Kennedy with a return to Camelot. His attack on banking and finance, one of today’s second largest industry, seems to be following that same trajectory.
Will the constant attack on the financial, insurance and oil industries plus the medical sector expand a correction into a mini-crash? Will the Obama Administration decide that his leadership of the Democratic Party and the economy has suffered enough and will also turn from heavy-handed, punative anti-business approach to positive tax incentives to jump-start the economy as was done in 1962? Only time and some more pain will tell.
By the way, you do see a double-bottom and, yes, buying stocks after they crossed below the 300-dma at the beginning of April and buying them after the index crossed back above at the beginning of 1963 would have been good market timing strategy. It would have enabled you to avoid the severe correction and, perhaps, an even greater crash had the tax package not been enacted and economy did not improve as a result. In fact, the resulting bull market continued until 1966 when the Dow first hit 1000, an 86% bull market run from the June low to the February, 1966 high ….. a level not successfully breached until 1983, seventeen years later!