1907 Bear Market after the San Francisco Earthquake

Continued from...Rally after the San Francisco Disaster

Initiation of a Bear Market

Near the top of this bull market The Wall Streel Journal uttered a caution. It pointed out, on December, 15, 1906, that there had been a "line," especially, in the twenty active railroad stocks, and that the possibility of a break through the lower level of the line should be considered as indicating the warning of a coming decline. This forecast did not commit itself to anything more than a possible bear swing in what had been for three years a primary bull market. It was altogether too early to call the actual turn. In the beginning of 1907, large railroad earnings, materialized in the case of the spectacular dividend policy announced for the Harriman roads during 1906, were set off against high money rates, which, as we soon saw, were already beginning to warn the market, and business generally, of that severe crisis brought about later in the year; when the reserve of the old national banking system virtually went to pieces, call money became practically unobtainable at unparalleled rates, and the banks resorted to clearing-house certificates for the first time since the panic of 1893.

In the month of January, 1907, the active professional traders were selling stocks. Political meddling was beginning to scare investors, and before the year was out there was what amounted to a strike of capital. The decline in stocks had already started, and it is interesting to trace the elapsed time taken to decide that a major bear swing had replaced the preceding long-continued bull movement. A decline of prices in January is always disturbing to the stock market because that is a time of year when, other things being equal, the tendency is oftenest bullish. It is a time for cheap money, and the reinvestment of the profits of the preceding year. It is a time, moreover, when it is peculiarly unpopular to talk bearish in Wall Street. The prophet of evil, as I have already frequently demonstrated, is totally without honor in that part of the country.

Boom Times and a Falling Barometer

In the long bull market there had been an unusually large emission of new issues, and it was then that the late J. Pierpont Morgan originated the phrase about undigested securities. America loves a good, phrase, and that one caught hold. Industrial earnings, and especially those of the United States Steel Corporation, continued remarkably good. The railroads were making an excellent showing of both gross and net. But the sharp decline in the averages in January made our commentator most cautious, particularly in declining to predict a rally, much less assume that nothing more than a secondary reaction had been established. It was altogether too soon to be positive about the major movement. In fact the severe decline kept everybody guessing; but it appears from the records that early in March the existence of a primary bear market was conceded and The Wall. Street Journal, very like any other newspaper, was doing all it could to cheer up the dispirited investor with a statement of the genuinely satisfactory features.

Some Bearish Influences

But the market was looking at all the facts, and the far-reaching consequences of some of them were reflected in stocks. These bear arguments were given on March 15, 1907, and they read curiously now. They were:

Excessive prosperity.
High cost of living, due largely to the effect upon prices of a great gold production.
Readjustment of values to the higher rates of interest.
Speculation inland absorbing liquid capital that might otherwise be available:for commercial enterprises.
Roosevelt and his policy of government regulation of the corporations.
Anti-railroad agitation in the various states.
Progress of socialistic sentiment and demagogic attacks on wealth.
Harriman investigation of exposure of bad practices in high finance.
War between big financial interests.
Over-production of securities.
Effect of San Francisco earthquake.

There were other causes quoted of only momentary consequence, in which possible bear manipulation was put last. It has been said already that there never was a bear market which was not justified by the facts subsequently disclosed. Are we not entitled to say that some of these influences became permanent, to an extent which even the stock market could not possibly foresee, conceding that it is, at least theoretically, of longer and larger vision than any of us? As after events proved, the over-regulation of the railroads alone was sufficient to justify investors in protecting themselves, whatever the consequences to the stock market might be.

An Abnormal Money Market

In retrospect, the year 1907 seems to me the most interesting I have ever spent in Wall Street, and perhaps the most instructive. It is full of lessons and warnings. I wish that the scope of these discussions permitted a treatment of it in greater detail. There is no better story of it for the student than that of Alexander Dana Noyes in his Forty Years of American Finance. He was financial editor of the Evening Post at that time. I remember that at the beginning of the year, when industry was booming, when railroad gross and net earnings were making about the best showing on record, when the stock market was only receding a little from three years of advance, where prices, moreover, at least on paper, had not overtaken values, he was struck, as I was, by the abnormal money market. That is the time of year when money should be cheap, and it was almost painfully tight in February. The stock market foresaw the meaning of it long before we did, as the major bear swing of 1907 showed.

No Bigger Than a Man's Hand

There was a broker of that time, since dead, whose face comes up before me as I write. He talked in terms of Wall Street, but his illustrations were vivid and his intelligence was well above the average. He was an educated lover of music, and much more reverent than he sounded. He was speaking to me one day about a performance of Mendelssohn's "Elijah" that he had once heard, with the title role taken by the greatest oratorio artist of all time, the late Charles Santley. The dramatic story had appealed to my friend. He talked of the priests of Baal being "cornered bears of the stock Elijah controlled," and of "their frantic efforts to cover their shorts." He was impressed with the way Elijah had, as he expressed it, "joshed" them in their extremity, suggesting that their god was taking a nap or was, peradventure, "on a journey." There was a phrase that had stuck in his mind which describes the condition at the beginning of 1907: "Behold, there ariseth a little cloud out of the sea, like a man's hand." The "great rain" followed in the autumn of the year 1907.

Not only was the collapse in business tremendous. It developed with a suddenness which simply took our breath away. At the close of the year I was travelling on the Pennsylvania railroad with Mr. Samuel Rea, now the president and then the first vice-president of the road. The Pennsylvania carries - and carried then - a tenth of the railroad freight of the United States. Mr. Rea said that at a time when they were only a month away from the peak of their load, apparently able to count upon the crop movement and the industrial traffic, both ways, of the Pittsburgh district, business seemed to shut up like a jackknife, almost overnight. We could see the empty cars in the stub-end sidings and yards all along the system between Philadelphia and Pittsburgh, at a time of year when railroads are normally using everything but the cripples in the repair shops.

The Deadly Hand of Politics

There had been nothing like it since the collapse of 1893, when that Congressional monument of economic ignorance and sectional folly, the Sherman Silver Purchase Act, reaped its grisly harvest in the most demoralizing and far-reaching panic we ever saw. That seemed to have been a lesson to our lawgivers. The lean years which followed that panic, with the almost universal bankruptcy of the railroads and those who served them, finally put the fear of the Lord into the politicians. For ten prosperous years previous to 1907 they had quit kicking the business dog around. But in that year they had fully resumed that highly expensive sport, and before the end of the year there was a strike of capital. Every man who had anything to lose was terrified. Every man who knew anything foresaw what bureaucratic meddling and unintelligent regulation would do for the business of the country. It seems to me, if I am not wandering from my text, that this is largely what is the matter with the country now, war or no war, and that the stock market for two years past has been foreseeing some of the further consequences of fool politics. It may also be that in the impending improvement in business, already foreshadowed by the averages and, the underlying investment demand shown in bonds, the market foresees some return to sanity, even if the indications in Congress at present are anything but encouraging.

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From The Stock Market Barometer by William P. Hamilton, published in 1922