by Gary Alexander

May 5, 2020

Pandemics might be on a 50-year cycle. Everyone has heard of the 1918-19 pandemic by now, but there was also a severe 1968-69 pandemic that cost 100,000 American lives – mostly those over age 65.

According to the CDC, the H3N2 (“Hong Kong”) virus entered the U.S. in September 1968 and killed almost twice as many Americans as died in the Vietnam War, but the news media hardly noticed the killer bug. There were no state or local lockdowns and the stock market remained firm during the flu’s peak.

Dow Jones Industrial Average Percent Change during Flu Pandemic Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In 1920, the stock market corrected long after the flu bug left America in early 1919. It had nothing to do with the flu epidemic. The 1920 depression resulted from unemployment, caused by returning troops and labor unrest, and high inflation. Like the Federal Reserve under Paul Volcker in 1979-82, the Fed of 1919-22 was determined to slay the high war-fueled inflation rate, by raising the Fed’s Discount Rate.

Consumer Price Index Inflation Rate Table

Overnight Broker Lending Rates and Fed Discount Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Fed raised the Discount Rate from 4% to 7% from late 1919 to mid-1920; source: New World Economics

Think of the current Fed and then flip the scenario 180 degrees. The 1920 Fed (like Volcker’s 1980 Fed) raised interest rates to kill inflation. From 1917 to 1920, prices rose 83.5%, but from 1921 to 1933 prices declined. As in 1981-82, the cost was a deep repression running 18 months, January 2020 to July 1921.

Economic statistics were primitive then. Some say the GDP fell 2.4%, others say -6.9%. I’ll go with Jim Grant’s short summary in his 2014 book, “The Forgotten Depression, 1921: The Crash That Cured Itself.”

“The nation’s output in 1920-21 suffered a decline of 23.9% in nominal terms, -8.7% in inflation- (or deflation-) adjusted terms. From cyclical peak to trough, producer prices fell by 40.8%, industrial production by 31.6%, stock prices by 46.6% and corporate profits by 92%.”

The Dow Jones Industrials fell by 33% in 1920 after rising by over 30% in 1919. Sound familiar?

The Dismal First-Quarter GDP Figures are Now Rolling in

The 2020 GDP toll is just starting to come in. The coronavirus did not escape China and invade Europe and America until late February – only impacting March statistics – but quarterly totals show significant declines. As of the end of April 2020, preliminary GDP figures started appearing for the first quarter:

  • On April 16, China reported a year-over-year decline of -6.8% in their first-quarter GDP:

China's Economic Growth Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

  • On April 29, the Bureau of Economic Analysis reported that the preliminary U.S. GDP for the first quarter of 2020 fell at a 4.8% annual rate, the worst quarter since 2008.

United States Gross Domestic Product Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

  • April 30, Eurostat reported a -3.8% seasonally adjusted GDP decrease in the euro area (and -3.5% in the EU) in the first quarter vs. the previous quarter, a 14.4% annual rate of decline.

Now, let’s return to 1920. After the dismal deaths from World War I (117,466 soldiers died from the U.S. forces and over 10 million worldwide) and the flu epidemic (675,000 in the U.S. and 50 million globally), we endured a recession that launched the not-yet-roaring 1920s. Wartime inflation unwound viciously with an annual rate of deflation of between 13% and 18% (estimates vary). Unemployment peaked at around 10%. But stocks and the GDP rose rapidly in the nine years that followed – the Roaring 20s.

Real Gross Domestic Product Change Table

In short, it took a decade of pain to earn the Roaring 20s – two two-year recessions (1910-14), then a closed market for about nine months, a World War, a global flu epidemic, and a deep depression. Then came five years of 20% or more market gains and four years of 5% or more GDP gains (+13% in 1923).

What it Took to get to the Roaring 20s Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Stocks Now Anticipate 2021 Economic Growth

Stocks soared in April 2020, enjoying their best month since January 1987, when both the Dow and S&P rose over 13%. In April 2020, the S&P 500 gained 12.7% while the Dow rose 11.1%. Besides being the best month since 1987, it was the third-best monthly gain for the S&P 500 since World War II.

Best Standard and Poor's 500 Months Since 1950 Table

In the 1920s, stocks reached their absolute low on August 24, 1921 at 63.90 on the Dow – well below their 1906 peak. But from that low, stocks rose nearly six-fold (+497%) in eight years. This will not likely happen again, since stocks were at an all-time high in February 2020, but it is reasonable to expect a return to old highs by next year and double-digit gains in quarterly GDP numbers by mid-2021.

A Song for the Times: “Ain’t We Got Fun?” (1920-21)

There are plenty of song parodies on the Internet now. I prefer the real thing. I’m a song historian and one of the big hits of 1920-21 was “Ain’t We Got Fun?” The popular lyrics that are sung today go like this:

Ev’ry morning, ev’ry evening

Ain’t we got fun?

Not much money, Oh, but honey

Ain’t we got fun?

The rent’s unpaid, dear

We haven’t a car

But anyway, dear

We’ll stay as we are

Even if we owe the Grocer,

Don’t we have fun?

Tax collector’s getting closer

Still we have fun

There’s nothin’ surer

The Rich get rich,

And the poor get poorer

In the meantime, in between time

Ain’t we got fun?

Pretty clever, but the original 1921 hit version contained some starker lines, like these:

Landlord’s mad and getting madder,

Ain’t we got fun?

Times are bad and getting badder,

Still we have fun.

There’s nothing surer,

The rich get rich and the poor get laid off

When I’m laid off, I’ll be paid off

Ain’t we got fun?

(Music by Richard Whiting, words by Raymond Egan and Gus Kahn; first performed 1920, published 1921)

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

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“Computers Gone Wild”

Sector Spotlight by Jason Bodner
Is the Market Entering “Overbought” Territory Again?

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Read Past Issues Here

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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