Are Economic Conditions the Same as the Great Depression?

There are major differences between the current economic conditions and the government's response versus those that occurred during the Great Depression in 1929-1932. The table below details some of those differences.

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During the early 30's depression, the government responded by decreasing the money supply and raising taxes and tariffs. It would be helpful if the incoming administration strongly stated it would not raise taxes and tariffs as were proposed during the presidential election campaign. The charts below show that the government has done everything but reduce the money supply.

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Source: Econompic Data

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Source: The Big Picture

The current bailout pledges now total over $8 trillion which is over 57% of GDP.

So what does all this mean for the future direction of the stock market? Liz Ann Sonders of Charles Schwab & Co noted the following in a recent report:

Confidence will also come into play in the stock market—that ultimate mechanism of sentiment. Typically, stock markets bottom about 60% of the way through recessions. We've had 13 recessions since (and including) the Great Depression, 12 of which had accompanying bear markets or major corrections. Only once (2001–2002) did the market continue to sell off after the economy began to recover.

The fourth quarter of this year is likely to post the steepest decline in GDP during this cycle, with a drop of 5% or more in the cards. The worst single quarter ever for GDP was the fourth quarter of 1958, when it declined by a whopping 10.4%. The stock market had been weak heading into that quarter, but 18 months later it was up 52%—and a steady ascent at that. That's by no means a prediction of what we might look forward to, but is a reminder of the market's tendency to price in the worst case scenario before it unfolds, not after.

So, keep an eye on the stock market. Often when it begins to rally on still-bad news, it's a good sign for a pending economic recovery. However, be careful trying to pick a stock market bottom simply based on past recession-related performance.

There are several articles that contain additional analysis and graphics on the government's bailout plan.

• Bailout Pledges More Than $8 Trillion (EconomPic Data)

• Bailout Pledges Hit $7.7 Trillion (Mish's Global Economic Trend Analysis)

Source:

• Five Reasons Why Today Is Different From The Great Depression (pdf file), Market Analysis, Research and Education, By: Dirk Hofschire, CFA, November 25, 2008.
• Recovery Watch 2009, Charles Schwab & Co., By: Liz Ann Sonders, Chief Investment Strategist, December 2, 2008.

Comments

[Steven Hansen:]

"Often when it begins to rally on still-bad news, it's a good sign for a pending economic recovery. " Liz Sonders

first i have the upmost respect for Liz and my brokerage Charles Schwab.

the market is in turmoil. massive unwinding and redemptions. going up or down is no indicator of anything except that it will go the opposite way the next day.

2008 Dec 05 04:49 AM

[notsosmart:]

what bs-believing those govt.unemployment figures.the anal sts dont know anything & contin uosly have an excuse for being wrong.think for yourself as all have an agenda.

2008 Dec 05 12:46 PM