Monday, September 21, 2009

The Stock Market During the Great Depression

There is danger in comparing any earlier period with the current period. A multitude of factors are are always different. This goes for comparing the current period with the period of the Great Depression, especially since the Fed may act very differently now from the way it did in the 1930's. That said, it is instructive to look at the era of the Great Depression to understand how stocks traded in those years. While many view the Depression era as a period of sustained decline, there were many powerful, albeit short-lived, stock market rallies during the period.

Here's WSJ on the Great Depression stock market:
The 48% rally of 1929-1930 turned out to be a tragic misfire, leading to an 86% plunge. The rallies in 1932 and 1933 together sent the Dow up to 110.74 in early 1934, from a low of 41.22 in 1932. Stocks then bounced up and down for years, with sharp gains and sharp declines.

One problem with these rallies is that they tend to lack follow-through. More than half the gains tend to come in the first six months. The rallies of 1929 and 1932 each lasted less than six months. In 1932, the Dow rose 94% in two months after it hit the low point of the Depression years, but then fell 37%. The 1933 bull market lasted somewhat longer, but there again, if you bought after six months you missed most of the gains, and then saw stocks fall back below the level at which you bought.
The current stock market, as measured by the DJIA, is up 46% off its lows.

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