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Comparing the 1929 Crash with Today’s Market

It’s hard to listen to the news today without hearing about our record high stock markets. This is good news, I agree, but record high markets come with obvious implications – at some point they will no longer be at record highs. Given the things we’ve sacrificed or shortcut as a country to get here, how are we going to handle the fall? How will our own portfolios and clients’ portfolios absorb it?

Before I make a comparison to the 1929 stock market crash and the Great Depression, let me clarify the meaning of the price-to-earnings (P/E) ratio, which we’ll use to help us see the similarities and differences between then and now. The P/E ratio is essentially the amount that an investor invests into a company in order to receive $1 of that company’s profits. For example, currently Apple’s P/E sits around 22, which means that investors are willing to pay $22 per share for every $1 of the company’s profit. Seems high, does it?

Back in 1929, before the major crash and depression, the average P/E for all major indexes was 15. However, if you look back at the historical averages, a P/E of 15 is right in line. During that era, Coca Cola’s P/E was no exception as they also were in that range of 15. Interestingly, today Coca Cola’s P/E is sitting around 30. We smart investors today are willing to pay twice as much for their profit.

Between 2009 and 2010, Coca Cola made roughly $5 in earnings (profit) per share. From 2018 to 2019 that profit is roughly $1.50 per share. Their total company value in 2009-2010 was $32 billion, while today it has declined to $18 billion. Since the last recession of 2008, Coca Cola has lost 40% of its company value and per-share earnings have diminished by 70%.

I use Coca Cola as an example because I find the company fascinating, but I can make a similar case with nearly EVERY Dow index, with some in far worse shape. Yet, like Coca Cola, their stock prices have more than doubled?

In fact, the average P/E ratios of all major indexes are at least 50% higher than the historical averages. Let that sink in… our major markets across the U.S. and globally would all need to fall over 50% just to get back to normal averages.

As you consider that, remember that in order for the government to announce that we are in a recession, it needs two quarters of data to support that finding. In essence, before the government says the “R word” of recession, we would have already been in one for eight months! Rates are not cut when the economy is well, rather, rates are cut in desperation. We have cut rates three months in a row!

Though many are forecasting a recession soon, we do not know when the recession will occur. The prudent play would be to have 5-10% of client assets in physical gold and silver. With their historically inverse roles to the stock markets and given today’s potent cocktail of highs and uncertainty, there are a few reasons to seriously consider gold and silver, with the most important being its function as wealth insurance.

If you’re unsure of how to bring up gold and silver to your clients, as have been several advisors I’ve spoken to recently, it can be as simple as inserting a few lines into their holiday cards or emails. Feel free to reach out to me personally and I can share a few ideas with you.