A Market Recovery False Dawn

Stock values had plummeted by July 1932. Yet from July to August, the Dow Jones Industrial Average doubled, a huge leap given that bad news seemed to flow in from all directions.

Other positive reports also surfaced that summer. Were they to be taken seriously as a sign of recovery?

April building permits rose 20 percent over March, rather than declining as expected. In May, half of the of 20 U.S. manufacturing sectors at the time increased their workforces, even as makers’ and sellers’ inventories reached new lows.

Fresh demand led to more production orders. Detroit reported a business uptick in June, as did Cleveland’s hardware trades and Chicago’s wholesalers. At month’s end, the commodity price index turned upward for the first time since March, according to “Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms,” by Russell Napier.

But little of this impressed traders and investors. Periods of apathy broken by brief spasms of hopeful buying dotted May and June. On June 21, just 400,000 shares changed hands, the lowest turnover in eight years. Neither political conventions nor international conclaves on war debts had an impact. Short selling had spread, not least because investors tended “to pay more attention to fears of possible adverse news than to concrete actions which have tremendous potentialities for long-term improvements,” Napier wrote.

Then came a sudden bull run through July and well into August, when the Wall Street Journal wrote: “The financial community is still stunned by the gigantic proportions of the current rally in stocks. The oldest traders say they can recall no movement comparable in scope or percentage.”

The Economist welcomed the shift and, while “not proposing to assume the role of prophet,” observed that the related 10 percent increase in the “gold prices of primary products has practically wiped out the fall that took place” the spring before. Though the most active commodities were those central to international speculation, the writers suggested that such “a sharp upswing in the price level may be the harbinger of a revival of trade.”

Yes, the Wall Street revival was “sharp and spectacular,” but observers were conflicted. Conservative traders could see nothing to justify it, whereas once-miserable bulls could see nothing blocking a further advance. Surveying other periods of reversal since the fall of 1929, the Economist labeled the surge as “entirely normal. It is certainly no greater than would be expected at the end of a financial crisis.”

With the upswing continuing, the magazine asked, “Has recovery set in, without much conscious effort of statesmen, bankers or industrialists?”

Not likely, for this recovery created only “a breathing space from disaster.” Increases in “prices, production and employment depend essentially on the restoration of international trade,” which remained a long way off, given rising nationalism and deep international indebtedness, the Economist wrote. Sobering thoughts amid the enthusiasms of the day.

(Philip Scranton is a Board of Governors professor of the history of industry and technology at the University of Rutgers, Camden, and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog. The opinions expressed are his own.)

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