Great Depression and Stock Market

When people think about the stock market crash that started the Great Depression, they think it crashed all the way on October 29, 1929. Actually the market only lost about 12% of its value that day.

The stock market actually took nearly 3 years to finally reach the bottom on July 8, 1932. On that date the market was 89% below the highest peak reached on September 3, 1929. So the stock market actually crashed slowly over about 34 months.

Since I thought back in November 2008 that we were as close to creating the conditions that initiated the Great Depression as we could be, I thought I would create a spreadsheet with the stock market data from 1929 through 1940's and see if our stock market now was following the same pattern.

I plugged in our stock market peak of 14,164.53 obtained in October, 2007, and then created a column with the same percentage drops matching the depression stock market data on a monthly basis. The pattern has been remarkably similar except the predictions keep coming with a 3 month delay.

The spreadsheet predicted we would reach the 6000's by December 2008 but we didn't reach it until March 2009. I've been watching the spreadsheet since early December and it has predicted each month well. Though I have to keep at it with a 3 month delay.

If the pattern continues we should bounce around the 6000's with a pop to the 7000's occasionally for about 6 months and then the market should capitulate down to the 5000's.

If we followed the pattern all the way down, then we would reach the bottom of 1600 around November of 2010.

Are you depressed yet? Amazingly, I am not. I don't expect the pattern to hold.

I think there are many differences between then and now.

Then, the Federal Reserve was doing exactly the wrong thing that made things worse. Now, the Federal Reserve is doing what it should be doing and doing it well.

Then, there was no FDIC to insure depositors accounts. Now we have that.

Then there was no unemployment insurance, now there is. These are safety nets they didn't have back then. I think these buffer the economic crash somewhat. These were good FDR policies.

Unfortunately, FDR created several policies that made things worse such as wage and price controls which actually decreased the number of jobs.

I worry that President Obama is making similar mistakes. Some of the policies I'm seeing I think will make it more difficult for small businesses to keep or hire employees.

I'm not ready to give up yet. I think at any point along the way we can still create policies that stop the crash and start a rebuild.

Fortunately, things do start to repair themselves. For example, everyone is saving again. That hurts the economy now but it does put more money in the banks which helps them to heal. Also, long term that built up stash will start looking real good for spending after a long enough time of deprivation. At some point you want to live a little and stop being afraid.

It may take a few years but eventually things will turn up. They always have. :-)