Current Crisis Trading on Par with Beginning of Great Depression

Today marks the one year anniversary of the all-time closing high set in the Dow Jones Industrial Average. On October 9th, 2007, the DJIA set an Intra-day high of 14279.96. One year later, we are off 35.8% (as of midday Thursday). Since this current situation is currently being compared to the Great Depression, let's do some comparisons...

On September 3rd, 1929, the DJIA reached a record intra-day high of 386.1. One year later, September 3rd, 1930, it had fallen 38.5% Notice how closely that parallels the current crisis.

So looking at the current level of the Dow, are you ready to jump in at these bargain-basement levels? Before you act, let's look at what happened in years two and three of the Great Depression. Suppose you jumped into the market in September of 1930 thinking you were looking at similar bargains...




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By September 3rd, 1931, the Dow had fallen 65.5% from its peak just two years before.

On July 8th, 1932, the Dow had an intra-day low of 40.56, or 89.5% off its peak in less than three years.

So the next logical question is, how long did it take to recover back to the peak of 386.1? Are you ready for this?

November 26th, 1954...a full 25 years after the peak set in 1929.




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Seeing how the first year of the current crisis is trading on par with the first year of the Great Depression, one could draw the conclusion that we may not see Dow 14K again until 2032.

Disclosure: none

Comments

[Piggybank:]

And using the same logic of vague comparison, i predict Argentina will win the 2010 world cup soccer.

2008 Oct 09 02:49 PM

[Smarty_Pants:]

And then when you do finally break even in 2032 your current $100,000 portfolio might be enough for a downpayment on a nice used car.

Median home 1970 = $17,000
Median home 2000 = $119,000

You would then need to grow your portfolio by about 600% between 2032 and 2037 to catch up with inflationary losses in purchasing power if history is any guide. Before you 'buy and hold' stop and think.

2008 Oct 09 02:51 PM

[endoftheworld:]

What were the forward and trailing earnings multiples back then? There are so many companies trading at single digit PE's and multiples of CF right now. Pick any multiple type - you can bet there are companies getting taken out and shot for simply being listed. Trick is having the cash to buy them when everyone believes there will be no tommorow, or at least a tommorow within the next 30 years.

2008 Oct 09 02:58 PM

[Jolly_Rancher:]

The people who have cash are the top insiders in corporate America. They have milked companies year in and year out with high pay and stock options. If they want to keep their jobs, they had better start buying their shares right now in earnest,

2008 Oct 09 03:23 PM

[Smarty_Pants:]

endoftheworld: Earnings multiples aren't quite as important when debt load becomes unserviceable. The P/E for insolvent companies in 1929 quickly moved toward zero while today it drifts slowly downward waiting for Uncle Sugar to send a check in the mail.

Jolly Rancher: What incentive is there for insiders to start buying now? The corporate boards are as much to blame for paying so much. Do you blame your neighbor when he gets a raise on the grounds that he's diluting your stock earnings? Think he blames you for the same? Everyone strives to get the largest pay they can for their services. It's the dopes which agree to their demands on behalf of the shareholders who are supposed to be economical with company money.

2008 Oct 09 04:58 PM

[Matt Callow_:]

FYI, I wrote this article when the Dow was down about 100 points today. The fact that it fell another 578 prior to the close emphasizes the point of this article even more.

2008 Oct 09 04:58 PM

[endoftheworld:]

Smarty_pants: for example, you think the Gulf of Mexico oil companies are going to go bankrupt, unable to sell oil or their reserves in order to service debt? Even companies with little or no debt are being hacked off at the knees, trading at low single digits of cash flow. i think even in a great depression you'll still need to drive & heat your home... even prior to this crisis worldwide overall production was declining despite massive capex .. wonder what'll happen now? these companies would be idiotic not to reduce capex and divert most of their discretionary cash flow to buybacks instead of pumping oil and gas. best learn to shoot and hunt and enjoy the dark night sky

2008 Oct 09 10:02 PM

[Smarty_Pants:]

endoftheworld: Much of what you say is true, but be aware that the ugliness is just starting now. The earnings numbers for many companies will be revised downward in the future as the economy slows down.

This is also a different world than the 1930s. Few companies pay regular dividends like most did back then. At the bottom dividend yields on blue chip companies were around 6% during the depression. I think the Dow dividend is nearer 3% now.

Prices will stop falling when most stocks once again become bargains in the true "pay me a good cash flow for my investment" sort of way. Buying for quick capital gains will become less prevalent until that level is reached in aggregate.

Naturally there will be exceptions to that general statement, but they will be few and far between.

2008 Oct 10 01:04 AM

[Fabien Hug:]

It is absolutely useless to compare the 30ths with today's situation and it is not even worth talking about it.

2008 Oct 10 09:43 AM

[kurt walter:]

Around a trillion dollars of bailout money equals about 7 trillion in lost market value. Please, government just go away. Do nothing more. Quit putting band aids on a cancer patient. Quit throwing taxpayer money to the terminally weak. Wasting so much taxpayer money will cause even more problems with inflation and a very weak dollar in the next decade.

2008 Oct 10 10:38 AM

[carey_jim:]

For thirty years, we've had a silent depression of homelessness, increasing income and wealth imbalance and other economic problems.

There are many "cryto-economic problems that aren't usually thought of as economic problems but really are, such as:

The highest rate of crime in the world (white collar crime included) and the largest prison population (white collar crime not included.)

The worst secondary education system in the first world.

The worst health care system in the first world which is, nevertheless, the most expense. (It's the best health care system for the rich, of course.)

A crumbling infrastructure (roads, parks, etc.)

Moral decay: alcohol, drugs, prostitution, pornography, adultery, multiple marriages, homosexuality .... (combined with rising religious fundamentalism :)

Irrational transportation network and national energy system.

Too much buying of useless things such as expensive cars, boats, private airplanes, etc. Over consumption in general.

The very expensive war in Iraq. (Defensive?)

More and more government intrusion into our personal and economic lives.

These are all economic problems whether we are fully aware of it or not.

Maybe a "Depression" (in all of its meanings) is the only way we can face our "Addictions" and other economic problems and correct them.

Then we Americans will be able to sing happily to each other, "Prosperity is just around the corner" instead of jealously glowering at each other and predicting "The sky is falling, the sky is falling ...."

2008 Oct 10 12:51 PM