Dow Jones Industrials Crash Analysis - Great Depression Versus Today
Article Submitted By: Sol Nasisi
I've wondering how the performance of the Dow in 2008 compares to the drop during the Great Depression. To find out, I graphed both and set them side by side. The results are interesting...
Today, as I watched the Dow sink below 8,000, I wondered how the sell-off of the last six months compares to the sell-off during the Great Depression. The chart below shows what I found. To create it, I graphed historical data taken from the DJ Indexes website for the Dow Jones Industrial Average.
Let me explain how to read the chart.
The years 1930 and 2008 are time 0 on the x axis of the graph. I then looked at the 21 years before 1930 and 2008 to see how the markets performed before the 1930 and 2008 crashes. I also charted the 10 years after the crash in 1930, represented by the positive numbers on the X axis. The left Y axis shows the Dow's price during the early part of the 20th century and the right Y axis shows the Dow's price in more modern times. One other note on the methodology is that I used the closing price of the Dow on November 11 of each year.
As you can see by looking at the blue and pink lines, before both crashes there was a sharp run-up in the value of the Dow. But the data shows that the pre-crash bubble is much bigger now than it was prior to the Great Depression. While the Dow increased about 2.5x during the priod 21 years before the crash of 1929-1930, it increased over 6X from 1988 to 2008.
In 1929, with Black Friday, the Dow began to deflate and it hit a bottom in 1932. By that point, the Dow was down almost 75% from its peak a few years earlier. Today, the Dow has fallen about 42% from its high of 13,850. As the chart shows, if this economic downturn is not over and comes close to approaching the early severity of the Great Depression, then the Dow is not done falling. It's important to note that the largest damange to the market happened at the beginning of the Depression. While economic problems continue until the beginning of World War II, the stock market began to recover from its lows in 1936. What does that mean? It means that even if our current downturn doesn't last as long as the Depression, it could be as deep for a concentrated period of time, and during that time cause further equity losses.
I don't usually use Wikipedia as a source but I came across this entry on the Great Depression and thought it appropriate. You can decide if there are parallels to today:
The Great Depression was not a sudden total collapse. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929.[6] Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the northern summer of 1930.
In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. Conditions were worst in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the American economy was the factor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better. Frantic attempts to shore up the economies of individual nations through protectionist policies, such as the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933.
The quote doesn't touch on the obvious parallels in the banking system. Although there haven't been as many bank failures, the magnitude of the financial failures today are enormous - Bear, Lehman, Fannie, Freddie, Wachovia, Washington Mutual, Countrywide, National Citi, AIG. I realize not all of these were failures but many of the banks listed were purchased at firesale prices to prevent a failure.
The question to ask yourself about this recession is whether you think it's like the relatively mild downturns of 2001-2002, and 1991-1992 and even 1980 or is it really the worst economic downturn since the Great Depression? Because if you believe the latter, then that blue line has further to fall.
For an update on this article from August 3, 2011, click here.
Comments
stock, November 07, 2010
The stock market today is so crazy.The stock market will open higher tomorrow.
the poker face, May 31, 2010
you all correct in a way to see what may happen in the future. the thing is that no one can fortell the future. just can tell you this in comparison to the great depression with our times now, the monopoly money game has come to something nobody is able to know whats happening. it seems that now people have become so brainwashed about what is going on around them, that it is easy for the masters of the system to sell whatever it likely to need for more of that pain. it looks like that we are just a few steps away from total eclipse of the system. better have something in your hand that can buy you safe passage than looking for the hand that gives you balsam, in other words be careful from the false prophets that are in sheeps wool!
Joe Shmoe, May 22, 2010
The chart quality is so poor. Buddy, can't your afford a decent charting program?
Bob Ross, May 07, 2010
A great man (My father) once told me that you can make a chart correlate anything, there was a famous picture of the New York skyline, that exactly fit a chart of the Dow for a given period of the 70's My point, anyone who truly knows what is going to happen won't be around until after it happens. Then they will tell you "See I told you so"
D.J.O., March 08, 2010
What is of great concern to me is the possibility of civil unrest. Our government no matter how much they try to stimulate the economy will be unable to satisfy the general population expectations. We cannot spend our way to prosperity. Short term view of stock prices should continue to rise until a majority of the stimulas money has been allocated.
Jakey T, February 18, 2010
I definitely think that the stock market, and our economy as a whole, has much further to drop. Despite the stimulus package as a means to attempt to stabilize our economy to some degree, it's obvious that it didn't manage to fully fix the situation, or to provide a long-term means of keeping our economy from falling any more. Mr. Obama, i sure hope you know what you're doing with our money, because what we need right now isn't someone who's going to play political games and spend it all go gain honors or more prestige, we need someone who will play a conservative role with our money, and bring out economy back to being prosperous.
Amadeo, February 16, 2010
Sarb could be partly right. What is the formula to get out of this mess? Should we go back to zero and then keep wages and prices steady?
Sarb Gill, January 03, 2010
Its amazing how things can change so fast. Some people are now under the impression that things have gotten as bad as they are going to get. Here, people in BC are not accepting the real estate bubble, even when you having esclating inflaiton, job losses, and people are putting down just 5%. Are we heading towards another depression? Well some countries are already in one and the rest of the world will follow in the next 1-2 years. These are hard times and in this type of enviorment new wars are guaranteed to start. The good thing is people will devlop class again dress nice, and believe in god, worship attendence to increase. After this next period of hyper-inflation the DOW will crash to around 3500. The US dollar and the British Pound will get hit really hard, maybe loosing 40-60% versus other currencies, but the whole world is priting money and fooling their people to believe a recovery is in order. This will lead to revolution in 2-3 years. The only way to protect yourself is to buy real assets, preferable gold and agriculture (inventories are very low and prices do not reflect that, which will cause over consumption and a lack of incentive for farmers to use more fertalizers to increase yields).
redneckinsect, December 20, 2009
i like the chart comparison, but agree with chuckoo on the y axis thingy.as for the 5 cents for bread thingy you have to also compair our present incomes also. i do agree with the fact that the govt. is incorraging bad spending habbits and should just give a flat tax cut if any. as for what the markets will do no one knows we are all guessing, but my guess is that it will not be quite as bad as the depression. what little money i have in the market i pulled out and will put back in around feb. march april of 2010.
martin, December 15, 2009
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MAX, November 16, 2009
although it is only updated though Oct. there is a comparision http://img62.imageshack.us/img62/9031/1929to2009092309.png
Randy, October 05, 2009
I think the market today is going through an accelerated version of the 1930s. The rise that peaked in 1936 is happening now as government cash pours into the economy. Look for a downturn over the next 6 mos. as the cash works its way through and then investors say: what's next?
Oneslip, June 03, 2009
I think the major comparison is the fact that in both cases of now & the depression is that it is a credit crisis, the 20's boom times were based on leverage just as the late 90's and early 2000's. In fact the ratios are even more expanded today then in the past. The market has been rallying since March 6th but I feel that this is still a bear market rally, the fundementals are still very horrible in fact the counrty as whole has suffered a huge balance sheet issue. The same thing happened in the 30's, the market rallied 20% and people got confident to get back in and then the market just descended for it's 75% drop, I do think the same can happen. I also feel the S&P is still overpriced & the yield is too low. I would love to be more positive and I have certainly enjoyed watching my portfolio climb out of the hole but longer term I am not confident.
raderator, May 31, 2009
The US economy was destined to collapse anyway because of the aging of the boomers and the transition of the US population to 3rd world makeup. The Great Depression happened to a much younger and much whiter country. The cause was the same, Marxist opportunists. Some of Obama's handlers are probably the grandchildren of the very Marxists who heaved Molotov cocktails in Russia and instituted their plans in FDR's whitehouse. "There is nothing wrong with Communism. Some of my best friends are Communists." -FDR. Obama can make the same claim.
StupidOne, May 12, 2009
Alex, I agree with you (we are in for some tough times, I don't think a depression though). I think the market was fluctuating a bit trying to make sense of things. With the bankruptcy of Chrysler and the pending bankruptcy of GM, I think we are in for some tough times. Look at the store closings in the retail sector, retailers are closing more stores than they had planned to. Yes, the layoffs went down quite a bit but I think some companies are currently in the planning stage to see what is the next step. I think if things continue as is, the layoff numbers will go back up.
Alex, May 12, 2009
i think the stock market is close to crashing again and we will soon have another great depression
Sarah South Jersey, May 06, 2009
apologize for non economist comment: due to mind boggling incomparable difference in information sharing globaly and corresponding awareness of global economic impact & hardship -- seems the powers are going to squeeze the best and the brightest to stop the hemorrage and it shouldn't collapse as badly as in the OLDEN DAYS (1929) now the whole fungus mushroom of exploding population WANT to survive and enjoy life and not participate in apocolyptic wallowing in reality show misery which leads me to believe the captains will right the ship as Nope suggests, we may be sailing again now, albeit with a sputtering engine.
Bazza, March 12, 2009
Nice analysis. An alternative and maybe surer base might be the longer term level of the index without the bubble. From your charts, the 1929 level might be about 130 and the Dow fell to say 70. The present base level might be about 10000 so an equivalent fall would take us to about 5400, which is about where Jacob Fries thinks it will be at the end of 2009. Still not pretty.
nope, March 11, 2009
Valuations were not as inflated in 2007 as they were in 1929. The fall has been just a precipitous, but the absolute decline just won't be as severe. We may have already hit the bottom actually.
Jerrold Peterson, March 09, 2009
The Stock Market bubble and crash of 1929 and 2008-09 have the same general cause: mal-distribution of national income. From 1910-1930 monopolies in most of the major industries redistributed income away from labor to capital. This non-market redistribution of income left labor unable to demand the products that industry was producing. From 1980-2008 the deregulation of the economy allowed the capitalist class to again redistribute income away from labor to capitalists. This redistribution, again, left labor unable to buy the houses and autos among other things that industry is producing. Louay S is in general right. Chamois an old economist
Adenovir, March 08, 2009
Excellent chart...I put a link up on the Motley Fool: http://boards.fool.com/Message.asp?mid=27504094 It really depends on where you call the start of bull market. The pre-1929 run-up is clearly steeper but our current run-up is larger in magnitude. At this point we are further down than 1930. It may in fact be a race to the bottom. Thanks!
Louay S, March 07, 2009
One major difference that drive the economy more than supply and demand is productivity, and since the use of personal computer (1989) and Internet (1995) Productivity went up by far more than the creation of agriculture tools or even electricity, so we can't compare 1929 heap of bubble by a true growth of 199x and early 200x. That is part of the 6X compare to 2.5X. Let me ask any one this: without a PC and Internet, how match less your productivity will go down?
Confused, March 06, 2009
To Econometrics today I read the us farmers are not planting corn because the price per bushel is way below the cost of growing it,there goes the food Cheers
Anonymous, March 06, 2009
Great idea, but your numbers are not exact. The DOW did break 14,000 at one point in 2007. Tweak your analysis.
Anonymous, March 05, 2009
"Today, we have a bunch of thugs who are bent on recasting the socio-economic system. " quote above What we had for the last 8 years of republican rule was a false economy based on crazy credit practices that enriched the super-rich of wall street, the bankers, etc, in an almost ponzi-like scheme. This scheme was not paying off old investors with new investors money, but bulls..ting people into bad loans, which the banks then flipped and kept their commission, while selling these known bad loans into the securities market. Meanwhile the Bush admin, which also gave us Iraq and $4/gal gas, deregulated instead of stopping these schemes, which benefited their very wealthy pals. Ultimately the housing bubble burst. And the people who got themselves into the economic hole are victims of the old adage that marketing really works. In this case because we had individuals buyers up against super-sophisticated bankers and lawyers and marketers who have spent their lives in that business. So while there is some blame for the dems also from the 90's, it is the Bush administration of the right wing repubs who have stolen this country blind. AND THEY ARE USING THE OLDEST TRICK IN THE WORLD - BLAMING THE VICTIMS, THE ORDINARY PEOPLE THEY SCAMMED, FOR THE PROBLEM. There is fundamentally something wrong with a nation where the top 400 peoples combined wealth is the same as the bottom 150 million people. Maybe we do need to recast the economic system, just as FDR did decades ago, which resulted in insuring our old people could live in dignity, and set up the conditions that resulted in medical care for our parents and ourselves in their old age. And ultimately, after WWII, in the middle class being able to buy their own homes, rather then being beholded to the wealthy landlords. (interesting use of a word that relates to God, btw) And the writer who made the quoted comment at the top is just a perfect example of the republicans, who would continue to destroy this nation, and the world, to continue feeding their greed. Note how the republicans, who doubled our national debt during the Bush years, scream about being fiscal conservatives, while during the later clinton years our debt was actually being paid off. And, by the way, while Obama is reaching out to the republicans, he is getting almost zero back, except for total recalcitrance and blame. Why - because that party's base is the old south, where segregation still rules in the minds of those people, and they are still mentally fighting the civil war. The republican party realizes that if Obama - a black man - succeeds, it will be the end of their base support amongst much of the southern 'confederacy' folks, and especially amongst the younger generation there, who are not poisoned by racial hatred, even though it isn't publicly expressed as such. And hence permanent minority status for the republicans. And another part of the republican party is the small 'self-made' businessmen, who are proud of whom they are and what they have accomplished, but are seeing their work of a lifetime destroyed. Some - there have been three incidents I alone know of where these people are so distraught that they have killed their entire family and then committed suicide. But if this part of the republican base comes to see a recovery under the Democrats, many of them will be republicans no longer. In summary - THE CURRENT BATTLE IS SIMPLY A BATTLE BY THE REPUBLICAN PARTY TO PREVENT THEIR RECEIVING THE BLAME DUE THEM, AND BECOMING A MINORITY PARTY. AND TO KEEP THEIR POWER THEY WOULD CHANCE DESTROYING AMERICA - RATHER THEN ADMIT THAT THE CRISIS LIES WITH THEIR WILD WEST ANYTHING GOES CAPITALISM, WHICH ENRICHED THEIR SUPER-WEALTHY PALS BEYOND ALL BELIEF. And, RE HISTORY, the great depression, which was world wide, also spawned Adolf Hitler. Distraught German people saw their economy totally collapse, so they fell for his message of hatred and power. And that spawned WWII and 50 million deaths. The current depression is spreading, and who knows what will happen somewhere else? Eg what will happen if the economies of the Arab states collapse, and they turn to Bin Laden by the millions, rather then the current small number of religious nut cases. But the republicans don't care. All they want to do is save their party, and they would do to America what happened with their like kind in Argentina some decades ago. A corrupt, militaristic like government stole everything, & destroyed their middle class who ended up living in trailers. That is what the struggle is really about - The republican partyââ¬â¢s , morally destroyed by Bush and his gang, keeping Power and wealth. They would destroy the middle class and this nation rather then admit their policies are the prime cause of the depression. Because their true God, and their so-called moral values (hitler spoke about values in his campaign for election btw) are really defined by 4 words - their God of Greed. May the real God bless America, and save the republican party from the monsters who control it, and save America and its middle class.
Sarb Gill, March 03, 2009
Since the government is using quantative easing (printing money) I think the DOW will bottom in nominal terms in the middle of next year around 3700. Buy gold or other real assets to protect yourself. High Inflation is very lickley!!
wb, March 01, 2009
The unfortunate difference between today and the Great Depression is that we had brilliant people come in to run the economy in 1932. Today, we have a bunch of thugs who are bent on recasting the socio-economic system.
Jacob Fries, March 01, 2009
I predict DOW 5,600 by year's end and a final bottom during the depression in coming years, below DOW 2,000. That is what an axiomatic reading of 1929 and the 1930s indicate, compared to 2008 and 2009. I trust history to repeat itself because people do not learn from their mistakes, least of all governments. There will be a Greater Depression.
Oakridge, February 27, 2009
This is an interesting comparison. However, Hoover didn't let the Federal goverment react so we lost a few years from '29-'32. It took Roosevelt to start getting the Federal government into the act in '32 and '33 and things started to improve even though many of his programs were temporary. Perhaps Obama's program will cause a quicker recovery. It all depends on employment.
Econometrics, February 23, 2009
While the financial crisis situation is simlair you need to factor out two key differences: 1) If FDIC can stay above water and people continue to keep their money out of their matress, the volitility shouldn't be as bad (lesser dive, but probably slower recovery). As long as capital is available, it can create jobs when the stimulus finally kicks in. 3) At least currently (knock-Knock)- we have no major (oil or food) shortage as did the great depression (Dust bowls)
'Dupe, February 23, 2009
This is a brilliant comparison of these 2 periods. Will look out for more information. Thanks for sharing.
watashi-A_hadiputro@hotmail.com, February 22, 2009
Thanks for this article. I'm currently starting on a research paper for my U.S. History class and this certainly helped me start. If you have any more informations, like the suicide rate, or crime rate of the two period, it'll be a big help. Thanks.
Bubba, February 22, 2009
What about the price difference between then and now, I think that would indicate we are in the Great Depression II, because today we sure cannot go out and buy a loaf of bread for $0.05, or see a movie for $0.25 or even buy a new car for the price it was back then. Do these people not even realize this... Or are they just not bringing it up to keep peace in America.
ellsfran@aol.com, January 29, 2009
If I had my way, we'd stimulate the economy by lowering individual's tax rates rather than issuing stimulus checks.In that way the economy would be stimulated each payday with people spending the extra money rather than saving it or paying off debts.Second,banks are afraid of toxic mortgages on the other bank's balance sheet. therefore, instead of just giving them money, guarantee their loans to one another otherwise they'll just use the bailout money to finance their cost of doing business and won't have to loan out money to stay in business, thus prolonging the credit crunch.
William A., January 26, 2009
I too believe the blue line has a long way to fall yet. I'm afraid that with the new stimulus package and the abysmal failure of the first, the commercial tsunami on the way and all the political bickering we will see a 5 or 6000 on the DOW before the end of 2009. God help us, I hope I am wrong.
Anette, January 20, 2009
Financials are melting down this week. Roubini says finacial system is insolvent. I think we have further down to go.
Karl, January 15, 2009
If that is to happen, and it quite possibly will, the next drop or boom will happen in the next couple weeks. I am personally betting on an Obama rally, but am preparing to exit the market if the S&P 500 drops below the level hit at the end of the last cycle.
Mungdavu, January 08, 2009
Who really knows what is going to happen......all the charts, numbers, and/or data is never going to be able to predict the future. I suggest everyone to take a listen to some REO Speedwagon and "Ride the Storm Out", because that is about all we can do at this point...... Keep Pushin' is what I say....
Chuckoo, November 25, 2008
Nice chart! I wonder how do you scale the two Y axes. As they are drastically different price range for the two periods. Depending on how you scale it, the downward slide that we are supposingly in as the chart suggests, may have a lot more to go or that we are already done. Thanks.
Sam Cass, November 21, 2008
Here's an interesting article comparing today to the Depression. I'm not as optimistic as the author but I also don't think things will be as bad the Depression. http://www.kiplinger.com/features/archives/2008/11/depression_not_coming.html
Barry Baker, November 20, 2008
Very insightful analysis and a good provision of context for the worst case scenario. The author is obviously brilliant and on-point. I have a request...can you research the comparable volatility of the Dow during the same periods?? Does the author think we are going into the Great Depression II? Keep up the great work!
