CWS Market Review – December 7, 2021

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Pearl Harbor: 80 Years Ago Today

Eighty years ago today, the Japanese military attacked Pearl Harbor which brought the United States into World War II. Many others have memorialized the event far better than I could. For my part, I want to look at how the financial markets reacted to that terrible day.

While the United States was at peace on December 7, its stock market was not in good shape. Since December 7th was a Sunday, the stock market was closed, but the day before, the Dow closed at 116.60. (The NYSE had a brief Saturday trading session into the 1950s.)

That was well below its peak from four years before. In March 1937, the Dow peaked at 194, and later that year, the bottom fell out. We tend to think of the Great Depression as one long recession but that’s not quite right. After several attempts to get the economy out of its depression, the economy crashed again in 1937.

From August to November 1937, the market suffered one of its sharpest drops on record. The 1937 crash may also be one of the most forgotten. Since it’s so close to 1929, the 1937 mess probably gets lost in the shuffle. Still, the Dow crashed 40% in just three months. From May 1937 to June 1938, the unemployment rate rose from 14.3% to 19.0%.

Things didn’t get much better. In May 1940, the market crashed again as the Germans marched into Paris. (“I remember every detail. The Germans wore gray, you wore blue.”). From May 11 to May 21, the Dow lost 21%.

We should also remember that stock investing hadn’t reached the middle class yet. ETFs and 401(k) plans were still many years away. The Great Depression scared away many potential investors. It took years to convince Americans that the stock market was a sound part of a financial plan.

By December 7, 1941, the market was still far below its 1929 peak. The Dow was 69.4% below where it had been 12 years before. Can you imagine investing for 12 years and still being that far in the hole? For us to say the same for today, the Dow would have to be at 2,850 instead of 35,700.

The market didn’t respond well to the attacks. On Monday, December 8, the Dow fell 3.50%. The selling continued into Tuesday as the Dow lost another 2.89%. As the reality of full mobilization set in, the market continued to fall. By April 28, the Dow reached its low of 92.92. That was ten days after Jimmy Doolittle’s daring raid over Tokyo.

Measuring from December 6, this was a drop of 20%. That was already on top of a lousy market. After 12.5 years, the Dow was still less than one-quarter of its September 1929 peak. You can see why so many members of the Greatest Generation were wary of financial institutions.

The government soon mobilized America for all-out war. That included our finances. The Federal Reserve reached a deal with the U.S. Treasury to buy Treasuries at a yield of 3/8 of 1%. The reserve banks dropped their interest rates to 1%. Americans bought bonds to fund the war.

In October 1942, Franklin Roosevelt issued Executive Order 9250 which limited incomes to $25,000 a year.

7. In order to correct gross inequities and to provide for greater equality in contributing to the war effort, the Director is authorized to take the necessary action, and to issue the appropriate regulations, so that, insofar as practicable no salary shall be authorized under Title III, Section 4, to the extent that it exceeds $25,000 after the payment of taxes allocable to the sum in excess of $25,000. Provided, however, that such regulations shall make due allowance for the payment of life insurance premiums on policies heretofore issued, and required payments on fixed obligations heretofore incurred, and shall make provision to prevent undue hardship.

Yes, this really happened.

Four years after Pearl Harbor, the Dow closed at 194.08. That’s a gain of two-thirds in just four years.

As it turned out, the April 1942 low was a historic buying opportunity. The stock market rallied almost continuously for the next 25 years. The American post-war economy was a boom for both the rich and poor. By May 1965, the Dow was up tenfold from its 1942 low.

The Stock Market Turns Defensive

Now let’s turn our attention to the current stock market. Today, the S&P 500 closed higher by 2.07%. It was the best day for the index since March and the second-best day all year.

The S&P 500 has now closed up or down by more than 1% in seven of the last eight sessions. That didn’t happen once in the 29 sessions prior to that.

From November 18 to December 1, the S&P 500 lost just over 4%. In the last four sessions, the index has made back more than 90% of what it lost. On an intra-day basis, the S&P 500 had a drawdown of 5%. This was our 29th such drawdown since 2009.

What’s stood out in the recent market is how defensive it’s been. By that, I mean that low volatility stocks have done much better than so-called high beta stocks. Here’s a chart of the S&P 500 High Beta Index (in black) along with the S&P 500 Low Vol Index (in blue).

Except for the last two days, the low volatility stocks have done much better while the high beta stocks have suffered the most pain.

That’s a big change from the dynamics that had ruled the market. What happened is that the Fed’s aggressive policies virtually eliminated risk from stock investing. As a result, all the risky asset classes took off. From March 2020 to June 2021, the S&P 500 High Beta Index tripled. Meanwhile, the S&P 500 Low Volatility Index gained just 35%.

Now that the Fed is shifting gears, some of that risk tolerance is shifting as well. Suddenly boring stocks are popular. For example, both Facebook (FB) and Tesla (TSLA) are 15% off their highs. The ARK Innovation ETF (ARKK), which holds many emerging growth stocks, is over 37% below its 52-week high.

Meanwhile, many fairly dull yet stable stocks are at new highs. This includes Abbott Labs (ABT), Procter & Gamble (PG) and McDonald’s (MCD). Hershey (HSY) and AFLAC (AFL) came close to new highs today.

A few times this year, there’s been a shift away from risk, but each time, the trend has petered out. This time may be different.

Stock Focus: Mesa Laboratories

This week’s stock focus is little Mesa Laboratories (MLAB) of Lakewood, Colorado. The company is involved in the lucrative business of high-performance measurement devices. It may sound a bit dull, but these kinds of niche-markets can be very profitable.

After all, there are countless uses for precise measuring devices. Obviously, these devices are crucial for the medical field, but the same is also true for food processing, electronics and aerospace. Mesa serves them all.

Mesa is fairly small compared with many publicly-traded stocks. It has a market cap of about $1.7 billion. One fact that I like is that Mesa is virtually ignored by Wall Street. Only a few analysts bother to follow it.

Despite being ignored, or perhaps because of it, shares of Mesa have done very well over the years. The stock is up more than 160-fold since 1995.

You know a stock has done well when the numbers on the log scale turn into a blur.

Mesa was founded in 1982. Their products include sensors that record temperature, humidity and pressure levels. Mesa also manufactures flow meters for water treatment, polymerization and chemical processing applications. In addition, Mesa makes kidney dialysis treatment products, including metering equipment and machines that clean dialyzers for reuse.

Mesa has four business divisions: Sterilization and Disinfection Control (39% of revenues), Biopharmaceutical Development (29%), Instruments (20%) and Continuous Monitoring (12%).

The Sterilization and Disinfection Control division makes indicators that are used to measure the effectiveness of sterilization for healthcare businesses.

The products in the Instruments division includes data loggers which are self-contained, wireless devices that do things like measure temperature and humidity. Data loggers can also measure pressure and validate the proper use of manufacturing equipment.

The last earnings report blew past expectations. Mesa earned 70 cents per share while the analyst community, to the extent that it exists for Mesa, had been expecting 42 cents per share.

In October, Mesa merged with Agena Bioscience. In Mesa’s words, this “creates new opportunities for us within Clinical Genomics tools.”

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Posted by on December 7th, 2021 at 6:56 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.