The Stock Market Barometer, Chapter 1

Cycles and Stock Market Records

AN English economist whose unaffected humanity always made him remarkably readable, the late William Stanley Jevons, propounded the theory of a connection between commercial panics and spots on the sun. He gave a series of dates from the beginning of the seventeenth century, showing an apparent coincidence between the two phenomena. It is entirely human and likable that he belittled a rather ugly commercial squeeze of two centuries ago because there were not then a justifying number of spots on the sun. Writing in the New York Times early in 1905, in comment on the Jevons theory, I said that while Wall Street in its heart believed in a cycle of panic and prosperity, it did not care if there were enough spots on the sun to make a straight flush. Youth is temerarious and irreverent. Perhaps it would have been more polite to say that the accidental periodic association proved nothing, like the exact coincidence of presidential elections with leap years.

Cycles and the Poets

Many teachers of economics, and many businessmen without pretension eyen to the more modest title of student, have a profound and reasonable faith in a cycle in the affairs of men. It does not need an understanding of the Einstein theory of relativity to see that the world cannot possibly progress in a straight line in its moral development. The movement would be at least more likely to resemble the journey of our satellite around the sun, which, with all its planetary attendants, is moving toward the constellation of Vega. Certainly the poets believe in the cycle theory. There is a wonderful passage in Byron's "Childe Harold" which, to do it justice, should be read from the preceding apostrophe to Metella's Tower. This was Byron's cycle:

"Here is the moral of all human tales,
'Tis but the same rehearsal of the past;
First freedom and then glory; when that fails
Wealth, vice, corruption, barbarism at last,
And history, with all her volumes vast,
Hath but one page."

There seems to be a cycle of panics and of times of prosperity. Anyone with a working knowledge of modern history could recite our panic dates - 1837, 1857, 1866 (Overend-Gurney panic in London), 1873, 1884, 1893, 1907, if he might well hesitate to add the deflation year of 1920. Panics, at least, show a variable interval between them, from ten to fourteen years, with the intervals apparently tending to grow longer. In a subsequent chapter we shall analyze this cycle theory, to test its possible usefulness.

Periodicity

But the pragmatic basis for the theory, a working hypothesis if nothing more, lies in human nature itself. Prosperity will drive men to excess, and repentance for the consequence of those excesses will produce a corresponding depression. Following the dark hour of absolute panic, labor will be thankful for what it can get and will save slowly out of smaller wages, while capital will be content with small profits and quick returns. There will be a period of readjustment like that which saw the reorganization of most of the American railroads after the panic of 1893. Presently we wake up to find that our income is in excess of our expenditure, that money is cheap, that the spirit of adventure is in the air. We proceed from dull or quiet business times to real activity. This gradually develops into extended speculation, with high money rates, inflated wages and other familiar symptoms. After a period of years of good times the strain of the chain is on its weakest link. There is a collapse like that of 1907, a depression foreshadowed in the stock market and in the price of commodities, followed by extensive unemployment, often an actual increase in savings-bank deposits, but a complete absence of money available for adventure.

Need for a Barometer

Read over Byron's lines again and see if the parallel is not suggestive. What would discussion of business be worth if we could not bring at least a little of the poet's imagination into it? But unfortunately crises are brought about by too much imagination. What we need are soulless barometers, price indexes and averages to tell us where we are going and what we may expect. The best, because the most impartial, the most remorseless of these barometers, is the recorded average of prices in the stock exchange. With varying constituents and, in earlier years, with a smaller number of securities, but continuously these have been kept by the Dow-Jones news service for thirty years or more.

There is a method of reading them which has been fruitful of results, although the reading has on occasion displeased both the optimist and the pessimist. A barometer predicts bad weather, without a present cloud in the sky. It is useless to take an axe to it merely because a flood of rain will destroy the crop of cabbages in poor Mrs. Brown's backyard. It has been my lot to discuss these averages in print for many years past, on the tested theory of the late Charles H. Dow, the founder of The Wall Street Journal. It might not be becoming to say how constantly helpful the analysis of the price movement proved. But one who ventures on that discussion, who reads that barometer, learns to keep in mind the natural indignation against himself for the destruction of Mrs. Brown's cabbages.

Next...Dow Theory and its implications

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