The Great Depression was a blotch in Wall Street’s history that many hope will never occur again. But is there any purpose in comparing our current markets and exchange traded funds (ETFs) to those of the 1930s?
Many saw that the analogies drawn of our markets to those of The Great Depression did nothing more than stir up fear, writes Mark Hulbert for Barron’s. But a severe bear market has some looking to this historical reference as a way in predicting the outcome of our equities market.
It is seen that a repeat of the 1930s may be less grave than assumed. While the implications of the depression was extensive, there are some things that are just categorized as myths if we are going by a 1930s-esque script.
- First, it was thought that it took 25 years for the stock market to recover, but the truth tells of a less prolonged recovery. People usually ignored dividends and focused on price alone, which allows a pessimistic bias into historical anaylsis. Wharton finance professor Jeremy Siegel calculates that the inflation-adjusted total return index of U.S. stock markets returned to its pre-crash peak in less than 8 years.
- Second, equities would provide decent returns over the next few years. It is shown that in just around 16 months, the stock market had declined by close to half on a dividend-adjusted and an inflation-adjusted basis. Seigel estimates that if the Dow were to suffer further declines like those of the 1930s, then it would be trading below the 3,000 level in July. The analysis of the matter shows that short-term investors may be the ones suffering.
- Third, recent market volatility does not compare in magnitude to that of the 1930s. The largest monthly loss was in September 1931, when the Dow lost 30.7%. The recent largest monthly loss so far was in October, with the Dow losing 14.1%. So if we expect a Great Depression-like situation, then we are in for larger swings in the markets.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.