Leader of the free world
One final factor gave the Roaring ’20s a rationale for long-term sustainability. The U.S. was unique among the world’s major economies in that it was never seriously affected by a World War. The devastation wrought upon Germany and Japan after World War II is well-known, but less remembered is the long-term damage left behind by World War I.
Losing nations were saddled with punitive reparations, and victorious nations still had to contend with the loss of millions of prime-age workers just as industrialization kicked into high gear in the U.S. The interconnected European economies all tended to suffer together. As a result, the U.S. alone, with its largely intact workforce and ample natural resources, was able to press toward new economic highs.
Bryan Taylor, writing for Global Financial Data, found that only four major European markets reached all-time highs within five years of the United States’ 1929 peak. Many suffered worse declines for longer periods of time than the Dow — Germany’s market peaked in real terms near the end of World War I and did not recover until 1951. Poland never recovered from a 1923 peak; after the Second World War, Soviet occupiers simply shuttered the exchange. As the U.S. was the last, best hope to make a decent return for many international investors, billions of dollars of gold and other assets flowed into American banks for investment purposes. This was ultimately one of several key factors behind the market’s collapse, as you’ll see in the second part of this series.
How will this end?
The Roaring ’20s had all the elements of a great technology-driven economic expansion. Up to the fifth anniversary of that decade’s great bear market, the Dow Jones Industrial Average (INDEXDJX:.DJI) increased at a brisk but not astounding rate of 21.8% per year. This is an enviable growth rate, to be sure, but in more than a century in operation, the Dow Jones Industrial Average (INDEXDJX:.DJI) has posted better annual returns on 25 occasions, five of which occurred before the start of the 1920s bull market. However, real earnings grew even faster. Over the first five years of the bull market, the 500 largest stocks on the market combined to produce annual real earnings growth of 22.4%! Until this point, investor exuberance might have been running high, but it was hardly irrational.
The end, as is often the case, experiences the frenzy. In the last three years before the peak of Sept. 3, 1929, the Dow Jones Industrial Average (INDEXDJX:.DJI) grew at an annualized rate of 30.5%. The bull market’s accelerating growth is also reflected in the marketwide cyclically adjusted P/E ratio. This long-term measurement of valuation increased by 140% in the bull market’s first half-decade but went on to grow by another 160% in its final three years. Real earnings growth slowed down dramatically, and in the last three years of the bull market the nation’s 500 largest public companies grew their earnings at a far tamer rate of 7.9% per year.
The article Why Did the Greatest Bull Market in History Last So Long? originally appeared on Fool.com is written by Alex Planes.
Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford and General Electric Company.
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