The Dow peaked intra-day at 386 on September 3, 1929. It closed that day at 381, an all-time closing high.
That high was seared into memory because the Great Crash would happen soon after. For 25 years, the Dow would struggle to do much of anything.
The unexpected happened on November 23, 1954. The Dow made a new high (a new intra-day high was hit the next day, the 24th).
Then a newer high was made. And another one. And again…until the Dow closed out 1954 at 404, with a 44% return (without dividends).
This was such a big deal that Congress opened a hearing on whether the stock market was too euphoric. They feared a repeat of 1929. So they called dozens of the best and brightest people to testify on the state of the market.
Bernard Baruch was one of those people. Baruch was an early Wall Street legend who began his career in 1891, set up his own firm in 1903, bought a seat on the NYSE, and became a millionaire by age 30.
Anyways, his testimony in The Stock Market Study offered a few highlights worth sharing, especially one equating the stock market with a barometer.
On the stock market as a barometer or why the market doesn’t cause booms and busts.
Your telegram of invitation states that you would appreciate having my views upon “whether present levels of stock prices and recent acceleration of stock market prices constituted a potential danger to the economy.”
At the outset, let me emphasize that no one knows whether stocks are too high today.
No one, not even the most experienced trader, economist or businessman can predict with certainty the course of the stock market. Whether stocks rise or fall is determined by innumerable forces and elements, by economic conditions, the actions of governments, the state of international affairs, the emotions of people — even the vagaries of the weather.
Scientific and technological developments opening whole new vistas of enterprise and investment, could prove that large sections of the market are underpriced and other sections overpriced. An unfavorable turn in the foreign situation could send securities tumbling. The assurance of real peace could bring unlimited demand throughout the world.
Largely because of the crash of 1929, the impression has built up that the stock market is the cause of booms and busts. Actually, it is the thermometer — not the fever. The stock market registers the judgments of multitudes of buyers and sellers about the many factors which affect business — what business is like today; what it will be like in the future.
This distinction between the thermometer and the fever is a crucial one. We face one kind of problem if the thermometer is not working properly. But outward symptoms should not be mistaken for fundamental causes. The thermometer should not be blamed for reflecting all the uncertainties of a world which is neither at war nor at peace, or of the effects of the actions taken by different business managements or of the inflationary policies which have been pursued for so long.
Mr. Baruch: Well, you know I did not know whether to say it was a barometer or thermometer, which changes it. The barometer would change according to the vagaries of the weather. But it is recording what the vast multitudes of buyers and sellers and holders of securities think. Now, of course that is what they think from day to day.
On the market being complex and unknowable.
Mr. Baruch: You ask is the market all right? Senator, I have been in it a good many years, but I have never answered that question, because I do not think anybody is smart enough to know, and I certainly would not want to put myself in that class of a demigod.
Senator Robertson: I do not want to insist on an answer, but you are about our most expert witness.
Mr. Baruch: As your expert witness, I tell you no expert is good on that.
Mr. Baruch: … You want to know whether the stock market has discounted inflation?
Senator Monroney: Yes
Mr. Baruch: If you can tell me what the government is going to do from here on, I will tell you that. You see, you and I do not know. And inflation is one thing that I tried to bring out in my statement, along with other factors which bear on the situation…
I do not know if I answered your question or not. It is not easy to answer, and it is not easy for the Secretary of the Treasury or you gentlemen here to measure all these various forces. I think it is a good thing to talk about them and think about them. It will make everybody else engaged in the process think about them.
Senator Monroney: Perhaps one of the things that this committee should look into is whether we are again entering a period of inflation, or whether we are in a stabilized period or in a deflationary period.
Mr. Baruch: Yes. I do not see how you can do it unless you get all these other factors… You see, there are so many factors which have to be balanced that one cannot say what the future will bring. If the dollar stays stable, that is one thing, but if we go on borrowing money and create a battle between the various pressure groups, why, the dollar value would change.
On why people buy stocks.
People invest in stocks for two opposite reasons — in hope and confidence in the future of an enterprise or in fear that the value of their capital will be lost through inflation.
The basic reasons why stock fluctuations today are so puzzling is because both these motivations are so active in our economy.
As I said, people buy stocks for two reasons, and very opposite ones. One is that they feel that the country will advance as it has been advancing. That has attracted a great deal of investment. They have seen vast fortunes made in that way. A lot of other people do it because they think in that way they can protect themselves against inflation.
On economists and predictions.
I think economists as rule…take for granted they know a lot of things. If they really knew so much, they would have all the money and we would have none.
I will tell you, Senator, why I think economists came into popularity. After 1929, these businessmen and everybody said, “What is the matter with me? Where did I go wrong?” So they had to go to a doctor. The only economic doctor is an economist and they go to him and say, “Professor, what about so and so?” And these men can take facts and figures and bring them together, but their predictions are not worth any more than ours. If they were, they would have all the money and we would not have anything.
They may have ideas like philosophers, but if economists could predict what was going to happen in the future, I rather suspect — I do not know, but rather suspect — that they all would speculate if they knew, and they could make a lot of money.
On respect and money.
And I am not for any fellow that runs any great rackets because he has made a lot of money… Money making is not all there is. The fellow with the most money is not the man we have to look up to.
I was very active in the stock market before World War I. I was what you would call a speculator, but I have my own definition of a speculator. that is one who observes the futue and acts before it occurs…
I was very active in the market then. I was a member of the New York Stock Exchange, a member of its governing committee, a member of the Young Turks, as they called them, that started to make changes that were very helpful, and very active in the stock market up to the time I cam down to Washington in the beginning of 1917.
There was not any person that was more active than I tried to be, anyhow, even if I did not succeed.
There are great opportunities for a person who is willing to devote his time and thought to it. The stock market is nothing for an amateur, a dilettante, to fool with.
I never knew an amateur to make any money in speculation. I have know professional to. And in all these things were you require peculiar training — it is like anything else. Whether you are an economist or a lawyer or something else, you have to make a specialty of it and devote all your time and thought to it. If you do one thing you might do it well. If you try to do two things, you are likely to do both of them badly.
Stock Market Study – Hearings Before the Committee on Banking and Currency, United States Senate, Eighty-Fourth Congress, First Session on Factors Affecting the Buying and Selling of Equity Securities, March 1955