Dow Jones Industrials Crash Analysis - Great Depression Versus Today

Dow Jones Industrials Crash Analysis - Great Depression Versus Today

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.

  Dow Jones Crash Analysis-Depression and Today

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.


  • 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 19, 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 17, 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 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.

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    December 15, 2009

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