Making economic or market comparisons to the Great Depression is almost always ridiculous…until now that is.

During the expansion between these recessions, excessive optimism rose to 2%, which it reached in mid-2007, before declining.

The follow on shocks to aggregate demand are likely to amplify these effects, extending the duration of the downturn. In other ways, we are far better off. During the period 1909-1929, inflation was also modest, except for World War I when it was high. The largest decline was from 1931 to 1932, when GDP fell by almost 13%.

Figure 3 clearly shows that during this period, P/E tracked earnings.

Figure 4: The time series of real GDP during the period 1929 through 1940. Back then there were no 401ks or IRAs or periodic contributions into the market. The Great Depression saw a reduction in government spending while we’re going to throw 10% of GDP at this thing (and potentially more).

A high P/E reflects optimism. As of last Thursday, the stock market was not in a bear market.

Largest single-day decline: … You can see in Figure 1 that both recessions correspond to a flattening of the curve, occurring at the points with small dips.

Currently serving as the Mario L. I have been a behavioral economist for over 40 years, lucky to be studying how psychology impacts the way the financial world works. Some people will look at these numbers and assume we’re heading down a similar path as the depression. I don’t know how bad things are going to get because the economy has never been effectively shut down like it is at the moment. During a severe economic contraction, individuals and corporations spend less money so it’s typically up to the government to make up for this shortfall. the same growth path as it did in the period 1930-1939. variables, for the period 2020-2029, follow the same growth path as they did in the period 1930-1939. Figure 6: The time paths of S&P 500 earnings and CAPE during the period 1929 through 1939. The Great Depression was the most severe stock market crisis to date, with the Dow tanking 89% from its pre-crisis peak. The chart shows a near-identical parallel between the 1928-29 market and today’s market, stretching back to …

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During the Great Recession, the S&P 500 fell almost 51% from its peak in October 2007. Figures 10 and 11 make clear that a repeat of the Depression would be much more severe than the Great Recession. Making economic or market comparisons to the Great Depression is almost always ridiculous…until now that is. At the moment, the outlook for economic growth is negative. Figure 2: Time series of S&P 500 and associated earnings during the period 1999-2019. GDP fell dramatically from 1929 through 1932, and leveled off in 1933.

The challenge now is to make it short-lived. But I am hopeful our response to the crisis this time around means things won’t get as bad as they did during the 1930s.

In addition, there are social safety nets in place today that were not in existence during the 1930s.

The decline occurred over a period of about 34 months. Recession of 1937-38. Great Depression Stock Chart. Every month you'll receive 3-4 book suggestions--chosen by hand from more than 1,000 books. The GDP series is annual. Nevertheless, for readers wondering what if — what if the the current contraction of the U.S. economy ends up being similar to the Depression — Figures 10 and 11 below offer a glimpse of what the first three decades of the twenty first century might look like in respect to GDP, earnings, and stock prices. What might we expect to happen to the price level during a contraction? Economic forecasting is notoriously difficult, and forecasting financial markets is even more so. Historical Trends During the Great Depression. More about me here. As for the dip at the right most portion of Figure 10, if a psychological phenomenon such as “decision fatigue” induces the country to declare victory over the pandemic prematurely, then we might be in for a double dip as happened during the Depression and for that matter again during the beginning of Ronald Reagan’s Presidency. This is one of the reasons there a bonafide recovery didn’t take place in the years following this downturn. These patterns pertain to the time paths of earnings, stock prices, and market sentiment as reflected in P/E. Figure 6 below displays the time paths for earnings and P/E.

The levels of volatility over the past month are worse than anything markets saw in 2008 or 1987 and are on the doorstep of Great Depression levels. During the Depression, the U.S. stock market was extremely volatile. If the government continues to help with fiscal rescue packages, that may not be the case this time around.

Institutions such as the FDIC, SEC, and Social Security Administration, and programs such as unemployment insurance, all came into existence several years into the Depression. Next, consider Figure 2 below, which depicts the time paths of the S&P 500 and associated earnings between 1999 and 2019.2 What this figure tells us is that broadly speaking, the trend in stock values reflected the trend in earnings.

The length of the contraction that has just begun might be similar to that of the Great Recession, roughly a year and a half; or it might be similar to that of the Depression, which Depression scholar and former Fed chair Ben Bernanke tells us is twelve years. By comparing Figures 2 and 7, we can see that stock prices tracked earnings during both twenty year periods, with stock price changes being more muted than corresponding earnings changes. You'll also receive an extensive curriculum (books, articles, papers, videos) in PDF form right away.

2020 Crash Pared With 1929 1987 2000 And 2008 2009 Nysearca.

We would need to four additional 30% losses before reaching Great Depression-era losses. It strikes me that these disparate assumptions provide reasonable forecast confidence intervals. Figure 5: The time paths of the S&P 500 and associated earnings during the period 1929 though 1939.

Figure 7 below is the counterpart to Figure 2.

The average GDP decline since 1948 is -2.3%, with the worst print coming during the 2007-2009 contraction.

Anything is possible. I would also point out that the major stock market bubble associated with 1999-2019 occurred at the beginning of the period, whereas the major stock market bubble associated with 1909-1929 occurred at the end of the period. Figure 7: Time paths of S&P 500 and associated earnings during the period 1909-1929. Great Depression Stock Chart Vs Today. I’m hopeful a massive recovery is on the other side of this once everything goes back to normal but that’s not guaranteed.

Earnings growth reflects economic growth. Being on the same table as 1987 and 1929 data is typically not a good thing. In some ways, the economic backdrop of the coming months will be similar to the Great Depression. During the past three weeks, more than 16 million people have filed for unemployment insurance. The daily price swings we’ve seen in the last month were beginning to rival what happened during the 1929-1932 period.

John Kenneth Galbraith once wrote, “The Federal Reserve Board in those times was a body of startling incompetence.”.

The source of the data for the S&P 500, earnings, and CAPE is Robert Shiller's website http://www.econ.yale.edu/~shiller/data.htm. During the Great Depression, they did the opposite.

Today, we’re getting $2 trillion in fiscal stimulus rescue funds plus another $4 trillion in loans from the Fed.

As can be seen in Figure 9, at the outset of the Depression the price level did fall; and it continued to fall until 1932 even though GDP and earnings were still declining. With the above comparisons in mind, consider the extent to which the relationships among earnings, stock prices, and sentiment that play out over the next few years will be similar to those experienced during the Depression.

Stocks then rose, with earnings, and earnings generally rose until the recession of 1937-38.

Not only did they pour gasoline on the fire during the speculative period leading up to the crash, but they did next to nothing in trying to stop the crisis as it was unfolding.

As can be seen, stocks tracked earnings very closely during the period, much more closely than has been the case in the recent twenty years (or as I discuss below during the twenty years that preceded the Depression). In textbook finance, P/E is relatively stable, reflecting the cost of equity capital and the net present value of firms’ projects. During the last twenty years, U.S. inflation has been modest. The scary GDP estimates we’re seeing these days are annualized so it may not be as bad as it sounds but those are still contractions we haven’t seen in many decades. That said, it is still conceivable that the current contraction will feature a comparable, if not larger decline in real GDP, from peak-to-trough.

about psychology, optimism, confidence, and market sentiment. However, there are a number of differences between 1929-1932 and its aftermath and the current situation. In my previous post, I discussed theoretical reasons why the price level might decline during the initial phase of a contraction. Economic stimulus from both fiscal policy and monetary policy has begun much earlier during this contraction than occurred in the contraction of the 1930s. If the trajectory suggested by Eichenbaurm, Rebelo, and Trabandt were to occur, then the dotted portion of the GDP curve in Figure 10 will turn out to be more compressed at the right end, with the duration of the U-shaped portion being perhaps between 15 and 18 months, with the peak-to-trough decline being comparable if not larger than that depicted in Figure 10.

I have been a behavioral economist for over 40 years, lucky to be studying how psychology impacts the way the financial world works.

I think it is conceivable but unlikely that the the actual time paths for GDP, earnings, and stock prices will all feature low amplitude, low duration versions of the dotted tail ends displayed in Figures 10 and 11. I propose Figures 10 and 11 as plausible scenarios to help guide our intuition about stock market risk, in respect to how the future might unfold; however, I do not propose them as forecasts. Just keep in mind that these figures pertain to aggregate supply shocks only.

Financial markets and the financial services industry, in general, were both far less mature in the 1920s and 1930s. Eichenbaum, Rebelo, and Trabandt analyze the impact on the economy of having weak containment instead of appropriate containment.

While this is a standalone post, it also comprises Part III of a blog series of tutorials on Great Depression economics. The range of economic and financial outcomes is wide. Nevertheless, there are important differences between the Depression and the current contraction, and it is important to keep these in mind when contemplating the future. Stock market great depression stock chart dow jones djia 100 year historical stock market crash of 1929 causes great depression economics 101 what.

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