When World War 1 ended in 1918, the US moved from a wartime economy to a peacetime economy. Growth was driven by recovery from war-torn devastation that spurred deferred spending, a boom in infrastructure rebuilding and a rapid growth of demand in consumer goods.
The decade that followed WW1 came to be known as the Roaring 20s. Innovations that included the mass production of cars, the launch of cinemas that provided a new form of entertainment and developments in medicine to treat diseases that were once considered fatal.
Good times were had by all, including stock-market investors. Between 1919 and 1929, US shares increased 20% a year, which equated to a six-fold jump in returns in a decade.
There are some striking similarities between what happened during the Roaring 20s of the twentieth century and events that are unfolding before our eyes 100 years later.
Instead of the mass production of cars powered by internal combustion engines, we are witnessing the rapid adoption of electric vehicles. Instead of cinemas, media streamed directly to our homes could become the entertainment of choice. And instead of penicillin we have vaccines that could help in the reopening of economies.
There are also interesting parallels between the stock market frenzy of the Roaring 20s and today’s investors who appear to be happy to climb a wall of worry. Much of that has been underpinned by very accommodating central banks.
It remains to be seen whether today’s stock-market euphoria will end in the same way that the curtains came down on the Roaring 20s on 29 October 1929, otherwise known as Black Tuesday. It is possible. But today’s central banks are better equipped with their weapon of choice to handle anything that markets toss their way – they have the big bazooka called Quantitative Easing.
But we should still remain vigilant and stick to our principles. Just because the price of an asset goes up doesn’t necessarily make it a good investment. We have to know why it has gone up.
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David does not own shares in any of the companies mentioned.