DEPRESSION STOCK MARKET
Robert O. Welk RowTek Economics
There
is now general agreement among economists that the current financial
and
economic problems are the most serious since the Great Depression of
the 1930's. Study of the depression generally includes the record
of the Dow Jones Industrials index. It had been published since
1896, at first covering 12 companies, but it was adjusted regularly to
reflect the main companies of the day and was increased to 30 companies
in 1928. At the time, it was the measure that was available daily
and was regarded as measuring the heartbeat of the financial
markets. It is still widely followed today, even though there are
many more representative measures of the stock market such as the
S&P 500, Russell 2000, etc.
This chart plots the month-end close of the DowJones 30 from January 1929 through December 1941. The image traced out by the index is well known to anyone who has studied the decade of the 1930's.
The depression is reckoned to have started with the stock market crash that occurred at the end of October 1929. On the basis of these data, stock prices dropped 88% to a low in June 1932. From there a brief rise occurred but then fell off again to establish a low in February 1933, 86% below the 1929 peak. Thereafter prices rose 264 percent to February 1937 after which the '37-'38 recession caused a 47% drop. After the recovery from that drop, prices trended downward through December 1941, the start of World War II. At that time, 12 years after the peak, stock prices were 69% lower than they had been at the peak.
Students of the depression attribute its severity and longevity to many factors: the Smoot-Hawley tariff bill caused world trade to collapse; president Hoover raised taxes; the Federal Reserve held monetary conditions relatively tight; and the New Deal stimulus programs (WPA, CCC, etc) were not large enough to dent the 25% unemployment rate.
The red curve on the chart traces month-end closings from March 2007 through July 2010. Between October '07, the beginning of this bear market, and July '10 (33 months) the decline has been 25%. The percentage decline (and monthly movements) in the parallel months in 1929-30 were virtually identical through April '09. From April '09 through April '10 the recent uptrend was a 35% gain, while in 1931 the comparable months declined. During the last three months (Apr to July) the DJI has dropped 5%. The comparison on this chart is not intended to predict that stock prices will follow the path that occurred in the decade of the 1930's. If that were to happen, the Dow would sink to 1700. Today's prominent economists and members of the new administration have assured us that the mistakes of the 1930's will not be repeated. They tell us that the stimulus plan, bank bailouts, TARP funds, TALF, auto industry help, Federal Reserve actions, etc. will avoid repeating the prolonged misery of the Great Depression. However, it is acknowledged that problems may yet arise that have never before been encountered, e.g. like the recent problems with countries in Europe. The close ties because of globalization make conditions especially difficult to manage. To complicate matters, recent weak U.S. economic indicators are causing many analysts to lower their forecasts for the future.
END
Copyright © 2010 RowTek Economics. All rights reserved.
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This chart plots the month-end close of the DowJones 30 from January 1929 through December 1941. The image traced out by the index is well known to anyone who has studied the decade of the 1930's.
The depression is reckoned to have started with the stock market crash that occurred at the end of October 1929. On the basis of these data, stock prices dropped 88% to a low in June 1932. From there a brief rise occurred but then fell off again to establish a low in February 1933, 86% below the 1929 peak. Thereafter prices rose 264 percent to February 1937 after which the '37-'38 recession caused a 47% drop. After the recovery from that drop, prices trended downward through December 1941, the start of World War II. At that time, 12 years after the peak, stock prices were 69% lower than they had been at the peak.
Students of the depression attribute its severity and longevity to many factors: the Smoot-Hawley tariff bill caused world trade to collapse; president Hoover raised taxes; the Federal Reserve held monetary conditions relatively tight; and the New Deal stimulus programs (WPA, CCC, etc) were not large enough to dent the 25% unemployment rate.
The red curve on the chart traces month-end closings from March 2007 through July 2010. Between October '07, the beginning of this bear market, and July '10 (33 months) the decline has been 25%. The percentage decline (and monthly movements) in the parallel months in 1929-30 were virtually identical through April '09. From April '09 through April '10 the recent uptrend was a 35% gain, while in 1931 the comparable months declined. During the last three months (Apr to July) the DJI has dropped 5%. The comparison on this chart is not intended to predict that stock prices will follow the path that occurred in the decade of the 1930's. If that were to happen, the Dow would sink to 1700. Today's prominent economists and members of the new administration have assured us that the mistakes of the 1930's will not be repeated. They tell us that the stimulus plan, bank bailouts, TARP funds, TALF, auto industry help, Federal Reserve actions, etc. will avoid repeating the prolonged misery of the Great Depression. However, it is acknowledged that problems may yet arise that have never before been encountered, e.g. like the recent problems with countries in Europe. The close ties because of globalization make conditions especially difficult to manage. To complicate matters, recent weak U.S. economic indicators are causing many analysts to lower their forecasts for the future.
END
Copyright © 2010 RowTek Economics. All rights reserved.
BACK TO MAIN PAGE