History shows markets can't always depend on strong fundamentals

The writer of "Keep calm and stay invested" (Feb 11) says that as long as improving fundamentals and growth momentum stay positive, steady hikes in interest rates are unlikely to derail the positive long-term outlook for equities.

However, economist Ravi Batra has said that there are reasons other than weak fundamentals that can cause market crashes, such as low money growth and the concentration of wealth.

To that end, I want to draw attention to the eerie resemblances between the strong economic fundamentals of the decade leading to the infamous 1929 crash and the pattern in the current decade leading to the record highs of Wall Street stock markets on Jan 26.

In 1921, a huge tax cut favouring the rich occurred, and unemployment rose sharply.

In 1922, there was a sharp fall in interest rates, and a sharp rise in the stock market.

In 1923, a very sharp decline occurred in unemployment, and the stock market continued to rise.

In 1924, inflation was low, interest rates were stable, and the stock market continued to rise.

In 1925, unemployment fell again, and inflation was unchanged.

In 1926, the stock market broke another record, unemployment declined sharply and the Revenue Act of 1926 sharply reduced tax rates.

In 1928 the economy expanded briskly and continued to do so until the middle of 1929.

And then, the market crashed.

To conclude, the classic case of positive fundamentals preceding the 1929 crash debunks the "weak fundamentals theory" upheld by some economists.

Wong Toon Tuan

A version of this article appeared in the print edition of The Straits Times on February 14, 2018, with the headline 'History shows markets can't always depend on strong fundamentals'. Print Edition | Subscribe