Party Like Its 1914

Tyler Durden's picture

Forget the last two day's decline.  The consensus opinion for 2014 is pretty uniform: stocks will go up modestly, bond will decline in similar fashion.  Job growth will grind higher, as will inflation.  The Fed will taper its bond-buying program, slowly.  And so it may all come to pass...  But ConvergEx's Nick Colas ponders what could go wrong, or at least different.  Top of his list: fixed income volatility, in conjunction with stock market valuations that are, at best, average. Colas reflects ominously on 1914, where if you read the papers of the day you would have seen much of the same "Yeah, we got this" tone that prevails today

Seven months later, and the New York Stock Exchange had to shut for +4 months due to the start of World War I.  No, we aren’t calling for Armageddon.  After all, the Dow started 1914 at 57.7 and ended at 54.6, even with the European war.  But one thing we know for sure – the time to worry is when no one else seems concerned.

Via ConvergeEx's Nick Colas,

Consider the following quote from the New York Times: “Whatever may be said of the stock market there can be no doubt that the investment situation afforded grounds for a most hopeful view of the outlook.”  Aside from the archaic-sounding wordiness, it is a good summary of the current outlook for U.S. stocks.  Economic conditions are improving, as is investor confidence.  Last year’s 30% return for the S&P 500 means even retail investors are returning to stocks, much as swallows portend the arrival of Spring after a chilly Winter.  Things look good for 2014, both in the domestic economy and stock markets.

The date of the quote, however, is not January 2014, but rather a hundred years ago: January 31st 1914.  The Dow Jones Industrial Average stood at 60.6, up 5.0% from the start of the year.  The first few days of 1914 had been choppy, to be sure, but the good returns of January were enough to give investors some hope that things were solidly on the mend.  The Times did feature some stories about the political situation in Europe, but there was more ink spilled about the fabulous parties given by New York’s 1% of the day.  Fifty person sit down dinners seemed common, with a separate guest list for those who merely attended the coffee and entertainment afterwards.  Not quite as spicy as Bethenny Frankel’s lastest boyfriend – today’s hot news – but close enough.

Just six months after that quote, the New York Stock Exchange closed for over four months.  The start of World War I meant that foreigners – mostly British subjects – wanted their money out of U.S. stocks and repatriated back to their local currency.  The Treasury Secretary at the time felt that suspending the gold standard – the method of exchange between different currencies at the time – was too costly to America’s reputation.  The only alternative was to freeze the U.S. capital markets, and the NYSE did not reopen until December 12th.

Despite the opening salvos of the Great War, U.S. stocks fared pretty well in 1914.  The Dow ended the year 54.5, down only 5.5% for the year.  America’s entry into the conflict would come in 1917, and at the end of the war in 1918 the Dow closed at 87.2  - 38% higher than the beginning of 1914.

Fast-forward a century, and the lessons of 1914 ring true: be careful when the market thinks it has everything under control.  And such is the case as I write this note.  Despite today’s 16 point drop in the S&P 500, the narrative of the U.S. equity market is resoundingly bullish.  A few of the more optimistic sound bites:

Stocks have just finished a very strong year – up 30% for the S&P 500 – and that will draw further money flows.  If you exclude the last 5 years of data from mutual fund money flows, that is generally what happens.  Up markets do tend to pull in more capital from retail investors. Strength begets strength, as the old market aphorism reminds us.


The Federal Reserve has set up market psychology to welcome a tapering of its bond-buying program.  Chairman Bernanke first raised the issue at the June FOMC press conference.  Then economic data started to improve modestly, and at the December Fed meeting it followed through with a $10 billion reduction in the program.  If the Federal Reserve follows through with further reductions in 2014, markets will see it as further sign of economic strength.


Interest rates are still low enough that they offer little competition to equities. With the 10 year U.S. Treasury yielding 2.99%, bonds are still bringing a knife to a gunfight with stocks.  The common wisdom has it that bonds will gradually decline in value of the course of 2014 as interest rates rise with a stronger domestic economy.


Europe and Japan will turn their corners in 2014, albeit in slow motion.  The Yen will weaken, and the euro will hold steady.  The “Smart money” trade to own Japanese stocks (hedged against the currency) and European equities should work in 2014, as it did in 2013.


U.S. equity valuations have room to grow as revenue growth accelerates due to better economic fundamentals.  Right now, the S&P 500 trades for 15.3x this year’s expected $120/share expected earnings.  The bulls would say 17-18x earnings is fair for a recovery year, so stocks can rally another 18% in 2014.

All this sounds so neat and compact, and the rally last year seems to confirm the basic outlines of the case.  Yet that quote from the Times shows that the easy case may ignore a lot of important factors.  It wasn’t a surprise that Europe was a tinderbox in 1914.  It was the how, the when, the who, and the why that no one knew.

Happily, there is no World War in the offing in 2014, but let’s take a moment to consider some less-than-perfect outcomes that might make the consensus wrong.

The U.S. economy speeds up more than expected.  Right now, economists peg GDP growth here at 3% for 2014.  What if they are too conservative, anchored in the recent past rather than more typical economic recoveries?


The problem with this scenario is that it takes a predictable Federal Reserve and makes it harder to understand their future policies.  No one thinks 3% is the “Right” yield on the 10 year Treasury, given the Fed’s aggressive buying over the last three years.  And with a gradual reduction in this program, we will find out – slowly – what the market rate actually is.  A quicker pace of economic expansion will drive inflation and force the Fed to cut the program more quickly than expected.  Fast rising rates will also make car purchases and mortgages more expensive, taking two legs off the stool of a typical economic recovery.  It is bond market volatility which challenges the bull case for stocks most profoundly.


Stock valuations begin to feel too full.  Stocks multiples tend to grow like teenaged children – growth spurts followed by periods of consolidation.  Last year’s rally was essentially all valuation expansion – earnings expectations actually came down as the year progressed.  Yes, the bullish call for further multiple expansion has some limited history on its side.  We did get to 18x earnings in the 1990s and we could again now.


In the historical spirit of this note, however, lets look at the Shiller P/E – a 10 year look back at earnings as compared to current prices.  The average for this measure is 16.5x, going back to 1880.  We are now at 26.2 times.  Now, U.S. stocks can still grow into these numbers if earnings continue to climb.  But the Shiller P/E illustrates an important point: we HAVE to grow into this number, for there is little margin of safety otherwise.


The butterfly of chaos theory flaps its wings.  We start 2014 with U.S. stocks at all time highs, expectations of improvement to come, and a high degree of confidence that the future will be predictable.  That initial condition leaves very little gas in the tank if something goes awry.  It doesn’t have to be a policy mistake from the Fed or a twitchy bond market.  The disruptive event may be nothing more than a January swoon for stocks that pulls back the indices 7-10% and gives investors pause about the year ahead.

As the great market sage Yogi Berra once opined, “It’s tough to make predictions, especially about the future.”  Our historical case study about 1914 comes neatly on the 100-year anniversary of the start of World War I, but you needn’t expect a cataclysm to take its cautionary tale to heart.  The U.S. economy and capital markets have much to commend them, but the current optimism seems to run ahead of fundamentals for the moment.  Perhaps today’s pullback is the start of a correction, and that would be both healthy and positive for 2014.  Either way, a cautious outlook is the better part of valor so early in the year.

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A Lunatic's picture

Happily, there is no World War in the offing in 2014.....



fonestar's picture

I've always hoped to find a 1914-D Lincoln while roll searching, never happened.

bobert's picture

I got a 1951 D VF in the coin return today at Walmart.

Then a 1955 D VF as change from the teller at COSTCO later in the day.

Value - probably 10 cents each.

Makes my day never the less!

Cult_of_Reason's picture

There are more phony 1914-D Lincolns in existence than authentic.

The coin on the picture is counterfeit.

bobert's picture

Wow, you be good.

I was going to ask about the striping on that coin but then read your comment.

You're able to tell from the picture provided?

mjcOH1's picture

Ferengi Rules of Acquisition:

#34 - War is good for business.[5]

#35 - Peace is good for business..[6]

christiangustafson's picture

You piker!

I received a 1909 VDB penny in change from buying ammo at the Wal*Mart on the edge of the world in Aberdeen, WA.

It was nicer than the one I already had.  Worth maybe $9.

It could not have been out in circ all this time -- it would have been a copper blank by now.  So someone desperate spent it!

Smells like teen spirit!

bobert's picture

Probably someone from Elma.

peter4805's picture

The scarcest wheatie I ever found was a 1911-S. That was many years and thousands of rolls ago. Nowsdays I rarely find even the common dates made prior to 1959.

kridkrid's picture

Beat me to it. Syria, Iraq and Lebanon are merging into one war, China and Japan are getting frisky and both are likely in need of a distraction, almost as much as the US needs a distraction. A rise of nationalism across Europe complete with various zenophobic scapegoats and racist sentiments. There is world war in the offing, but it's WWII we should be considering, not WWI. The appropriate comparison is to the early 1930's, not 1914.

Xibalba's picture

Earthquake, Nuclear holocaust, World War, and Famine...What's to worry about? 

He_Who Carried The Sun's picture

Worried that there will be no worries?

BanksterSlayer's picture

Is Nick Colas unaware that World War Three started over two years ago? Does he not know that boots-on-the-ground are always preceded by some currency war and some nation being heavily in debt to the other nation?

kridkrid's picture

Currency War -> Trade War -> Hot War. Future historians will have plenty of options when deciding on a start date for WWIII. The Project for a New American Century wanted a Pearl Harbor Moment as a catalyst. I like 9/11 as my start date.

Ghordius's picture

no, I don't see a conventional or nuclear world war "in the offing"

diaries from 1913 are full of accounts how many feared a major war in Europe - without being able to foresee the exact shape, though

further, 100 years is a meaningless period of time, in human terms. 1714, 1814 & 1914 can't be compared as bearing any recurrence, so why should 1914 and 2014 be similar?

of course fear and outrage is becoming more and more a profitable media "commodity", so we'll spend the year discussing WW1

long gas masks?

max2205's picture

There weren't any HDTV or NFL back then.....they had to do something to be busy. .


FSA won't fight any war...

SAT 800's picture

The appeal to "exactly 100 years ago"; is a typical propaganda ploy playing to a defect in human reasoning, as you correctly point out. This remains true even if the author didn't know he was doing it.

Ban KKiller's picture war in 2014 except the continuing warby the corporate powers against the people.

War profiteers rule Amerika. Clearly. 

A Nanny Moose's picture

"Day ain't over yet" -Curly

smokintoad's picture

That's a sweet cent.


Uber Vandal's picture

There does seem to be a direct correlation between calamitous economic or other events and rare coins.

Pretty much any key date coin, even with modern bullion coins such as Gold Buffalo coins, will more or less match up with financial panics, depressions, recessions, etc. almost perfectly.



Greenskeeper_Carl's picture

"There si no war in the offing in 2014" I like your optimism, buddy

kridkrid's picture

Check me if I'm wrong Sandy, but if I kill all the golfers, they're gonna lock me up and throw away the key...

Greenskeeper_Carl's picture

its not my fault no one uderstands what youre saying...

therevolutionwas's picture

" war in the offing in 2014" except for maybe N Korea, Pakistan/India,Middle East, Russia, China conflicts setting off a war.

debtor of last resort's picture

That ring around your cock is "Made in China", and a bit rusty.

Future Jim's picture

One question implied by this article is whether 2014 will see another crash like 2008.

Has there been another set up yet like the change to mark-to-market in November of 2007 (when the recession started)?

Has there been another catalyst like the decision by Obama's future treasury secretary to bailout previous banks and then let Lehman fail right before the election?

Aren't we still living with the change that suspended mark-to-market in March of 2009 (when stocks began their ongoing upward climb)?

I am Jobe's picture

There are a few more places USSA can land and create Democracy I mean Totalirian Regimes to keep the empire going. 

More Wars 2014- Give the masses the Hope they need


bobert's picture

Let's try Cuba again.

rtalcott's picture

Long live the Czar

Long live the Kaiser!

bobert's picture

Haven't seen them lately.


Where are they hiding?

StickyDownside's picture

Actually, credit is given to Niels Bohr for that one, although Yogi may have borrowed it.

nakki's picture

Grow by addition of debt with stock buy backs. The 5th year of a pathetic part time recovery all fueled by debt and pockets of ridiculous real-estate valuations, aided by the fact that any gangster drug dealer can launder their money through real-estate no questions asked. If the S&P where up 20% this year we're talking 2225. Not saying it won't happen but suckers usually buy the top, and if retail is back they could pull the rug 30-40%.

Lin S's picture

I wonder if 2014 will be quiet, or tumultuous.  2013 was bad for me, as was the second half of 2012. 

I don't know why, but I feel good about 2014.  I am optimistic, and I am not normally given to optimism...



SAT 800's picture

It's fine to be optimistic; just don't invest that way.

TimmyM's picture

Apparently there is no chance of recession! Hahahahaha

Curiously_Crazy's picture

"Colas reflects ominously on 1914, where if you read the papers of the day you would have seen much of the same "Yeah, we got this" tone that prevails today. "

Ahhh crap - so we've gotta put up with another 15 years of this shit? Living the last 4 years of bullshit fairyland economics has been hard enough.

Teknopagan's picture

Can't help but feel the outbreak of WW1 had much to do with the birth of the Fed. What a great way to consolidate, make monster loans and throw them like faggots into a greater conflagration