Trustnet Magazine 61 April 2020 | страница 8

Cover story
in less than three months
in late 1929. 
However, it is what
happened next that
explains why the Great
Depression still haunts
investors.
“The Dow Jones lost 86
per cent before its trough
in 1932, principally due
to two banking crises
8 / 9
which caused long-lasting
economic damage along
with cumulative deflation
of over 30 per cent.”
The economic recovery
didn’t begin until 1933.
Equity valuations
were estimated to
be 70 per cent below
replacement value,
yet Hardy says more
important were the
Fed’s bond purchases in
the months before the
trough.
“At 2 per cent of
GDP, the liquidity
injection was similar in
proportion to that of its
first QE programme in
2008/09,” he adds. “This
coincided with growing
stability in commodity
and wholesale prices,
which enabled a
recovery to take hold.”
1973/74
Between the start of 1973 and
October 1974, the MSCI World index
fell by more than 40 per cent in local
currency terms, but this only tells part
of the story. As the US tried to come
to terms with the cost of the Vietnam
War and Lyndon Johnson’s War on
Poverty in the 1960s, the Nixon
Shock at the start of the 1970s saw the
end of the Bretton Woods system of
currency exchange.
With oil then quadrupling in price,
this meant inflation was the dominant
force on returns over this period. As
a result, Hardy says that the stock
market’s underperformance was
longer and deeper than both the Great
Depression and the global financial
crisis of 2008, spanning nearly two
decades leading up to 1982.
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“Nominal returns appeared strong
through most of this period, but
rampant inflation in the 70s meant that
stocks had been falling dramatically in
real terms,” he explains.
“In August 1982, the Dow Jones
bottomed out at an inflation-adjusted
level equal to that achieved in the
1920s, while discounts to estimates
of replacement value exceeded those
seen at the bottom in 1932.”
Adrian Lowcock, head of personal
investing at Willis Owen, notes the UK
was one of the countries hardest hit.
“Rising prices naturally forced trade
unions to demand higher salaries
for their members, which is also
inflationary,” he explains.
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