Lessons From The 1930s: The Stock Market And The Economy Are Not The Same

Tyler Durden's picture

Originally posted at Monty Pelerin's World blog,

Do Not Use The Stock Market To Claim An Economic Recovery

How often have we been told that the economy is recovering?

By my count we are now in our fourth “Recovery Summer.” The recession was officially (and mistakenly) declared over in June 09. Yet, no data series in economics not influenced drastically by liquidity and a zero interest rate policy (e.g., stock prices and home prices) supports the claim.

One has to wonder just how many summers it takes to add up to a recovery. Other than the Great Depression, no recovery has taken this long and this recovery has not taken yet.

Recovery advocates point to the stock market as a barometer of how well the economy is doing. Stock market performance has been impressive. The Dow ended the first quarter of 2009  at  7,600 (after an intra-quarter low of 6,500). At the end of May 2013, the Dow closed at 15,100. The difference between these two closes represents an increase of 99%. This result provides the ammunition for the economic cheerleaders.

Stock Market And The Economy Are Not The Same

The stock market is not the economy. Over the long term, its performance and that of the economy tend to correlate well. However, we are in a period where markets are less influenced by economics than by government interventions. The liquidity pumped into the economy and financial asset markets is highly unusual and cannot be maintained much longer. My take is that the stock market reflects Federal Reserve pumping more than an economic recovery.



If the stock market is a barometer of economic well-being, it might be useful to explore its performance in other difficult times. There is no better hard-time comparison than the Great Depression. Those who rave about the stock market as an indicator of economic health should be careful. Their ancestors might have used the same argument in 1937. The stock market closed at 72 in the second quarter of 1932 and hit a high of 195 during the first quarter of 1937.  That return dwarfs our puny recovery, representing a return of 171%.

So how did that work out?  The Depression did not end in 1937. Some argue that it ended with our entry into World War II. Others, and I am in this camp, argue that it didn’t really end until the mid to late 1940s. Regardless, using the stock market then as a guide to economic activity was just plain wrong. Furthermore, a lot of people went bankrupt believing the market and the economy were healthy in 1937.  Nine months later, the stock market closed at 121, about a 35% drop. Furthermore, it wasn’t until the first quarter of 1946, almost nine years later, that the stock market returned to 195. It was the second quarter of 1950 before it crossed 195 and the 1950?s rally began.

Some History

History is not a guide to the future, but it sure helps dampen wild expectations. Let’s look at some data:

  • In 1929 the stock market peaked at 386. In 1932, it bottomed at 42, a loss of over 90%
  • In the next five years it rose 75%, exhibiting the same type of recovery we have had since 2009.
  • From there it fell and took nine years to get back to the 1937 level.
  • It took 26 years, until 1955, for the stock market to return to its peak of 1929.
  • It wasn’t until 1966 that the Dow touched 1,000.
  • The Dow closed 1974 at 616.
  • It took 15 years, until 1981, for the Dow to close over 1,000.

Some observations from the above data are worth noting:

  • The stock market is never a sure thing.
  • History shows that it is volatile and not a good short-term predictor of economic activity.
  • Depending on timing, there are long periods when holding stocks produced almost no return (25 and 15 year periods cited above).
  • Large short-term losses and gains were possible throughout this period.

My Take

A key takeaway is that the stock market misled people during the 1930s and may be doing the same thing today. Those who want to argue against this position will declare the 1930s an unfair comparison because it was a Great Depression. Just what makes them think what we are in today is not the same thing, although not yet as far advanced. Given the trillions of dollars wasted to hide the true condition of the economy, that is not an unreasonable possibility. This liquidity hides the true nature of the economy (also falsely drives up financial asset prices) and creates even bigger distortions in the real economy. As recently expressed by John Rubino:

Stocks in general and home prices in many markets are literally back to 2007 bubble levels. The savings rate is as low as it was in 2007 and total debt is rising again, as mortgages and business loans more than offset a smaller federal deficit. So sustained growth from here would mean an even bigger asset bubble than the one that nearly destroyed the global financial system, while a return to recession would mean plunging stock and home prices.

A good case can be made for the fact that there is no recovery and that we are just beginning our decline. The efforts of government merely served to drive us more deeply into debt and stave off normal economic healing. If this observation is correct, all that has been accomplished is a postponement and accentuation of the pain to come. My economic sense tells me that is the case.

Whether you accept this conclusion or not, don’t be fooled by the performance of the stock market. There is little other than inflationary Fed policy to justify financial asset prices. Furthermore, recent performance really isn’t special as those living through the 1930s learned. In fact, what has happened recently doesn’t even measure up to the initial rebound that occurred during the Great Depression.

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RSloane's picture

This is all so obvious which begs the question of why trillions were spent on propping up an illusion on Wall Street while Main Street decayed and its citizens move through the new unreality like zombies.

Doña K's picture

It's no loger funny, heads should start rolling.

NoDebt's picture

That's what they said in 1937, too.

Rubicon's picture

Ok, we get it! Just tell us when!!

Oracle of Kypseli's picture

We may let gravity do the trick.

jbvtme's picture

there was no hft in the 30's.   this is a whole other ballgame

espirit's picture

Today, most assets of value are illiquid.  I know I'll attact naysayers by stating this, but consider the possibility that cash in quantity is illegal, and generally is converted to credit (0's, 1's).

All other tangible assets can't be moved quickly enough in a meltdown to avoid losses, but PM's in hand will get you where you want to go when other mediums of exchange fail at the whim of TPTB.

Liquidity is the saving grace. 

tango's picture

The crux is that there will never come a time when folks will agree that the market is responding according to true economic conditions. Someone is always upset at market performance.  In this case, it's those who sat out the rally due to ideological reasons (the crash is just around the corner/next week/next month, etc)

Does Tyler actually think securities investment is how the poor pass their time?  It's always been primarily for the wealthy because... that's where the money is.  Duh.  The difference between this bubble and the dot com boom is the absence of ludicrous ratios in the hundreds for stocks selling at $400/share.

Jonas Parker's picture

But... but... but... THIS time is different!



kridkrid's picture

It wasn't "propping up an illusion on Wall Street" as much as it was/is propping up the monetary system which is, quite literally, a Ponzi scheme. You could argue that this is the same thing, and that's fine, but I don't think most people understand what is being done or why it's being done. Virtually all money is loaned into existence with interest attached. Only the system doesn't contain money to pay both principle and interest. So for both principle and interest to be paid, more money must be created/loaned into existence. The system doesn't care who takes on the debt as long as aggregate debt continues to expand.

This works just fine on the way up, but as it becomes more expensive to service the debt, the system starts to buckle. We've created all sorts of mechanisms and entire industries to inflate this further and further. Trillions were created (created is the more important word than spent) so that a system choking on existing debt could issue more debt. But you can't lose sight of the creation process... created isn't "out of thin air"... it's never out of thin air. Created is loaned into existence. We are issuing debt in order to transfer debt in order to "free up credit" which basically means to create more debt. This is how out monetary system works.

KnightTakesKing's picture

+1  This is an excellent, concise statement of our debt-based monetary Ponzi scheme.

DaveyJones's picture

yes, well done. It's more sinister when you realize just how criminal, dishonest and destructive it is. 

TeamDepends's picture

Very few know that one of the causes of the Great Depression was European bank failures.  Also, the Roaring Twenties were great on Wall Street, much less so out on the farm.

NoDebt's picture

It was their first try at real worldwide financialization back then.  Didn't go so good.  They'll get it right this time, I'm sure.

duo's picture

In 2000 GM and Kodak were in the Dow.  The comparison isn't fair.

NoDebt's picture

They change companies in and out of the Dow fairly often.

ejmoosa's picture

The DJIA is the most cooked index of them all.

tango's picture

I thought the 2000's were supposed to be the decade when the market had no basis in reality.  Easy to recall the concerted media and political ploy that a DOW of 14,000 with an unemployment of 4.8 did not reflect reality.   I guess now that it's 15,000 and 8-12% it's all fixed.  The market will ALWAYS be overpriced or underpriced according to personal performance - it's human nature.   If invested from the get-go, the FED boosts seems less relevant.  If someone is still "waiting for a crash" then they have a different take. 

fonzannoon's picture

who played btfd this am?

you nervous? 


Lewshine's picture

Only Tards and Insiders play Ben's created casino Fonz - And his skinny little fingers WILL ALWAYS have total control over bond yields...2.11 currently, down 6 bips - That's what this manufactured weakness in stocks is all about...Gettting the herd to fund LOWER YIELDS.

Son of Loki's picture

Stores were empty this weekend. People not buying their 124th dresss even with a 85% discount.



onewayticket2's picture

dinner last night, 6:30pm, quality, relatively low priced place in burbs.....EMPTY.

upon walking in, we asked "are you closed tonight?"


spooky is right.

fonzannoon's picture

ISM 49

Now what Mr. Bernak? Do we rally on QE4eva again? or has everyone finally had enough?

tango's picture

Good news must be viewed as good.   Bad news must be viewed as good.  All roads lead to the FED for any eventuality which is why I seriously doubt that it will ever completely stop buying.  I see it becoming the only player in the field - completely opposite of its traditional status. 

Sandmann's picture

So why not do a different calculation.


a)   Show how much was lost in the Crash of 1929, then how long it took to recover losses.

b)   How much deficit spending by UK and France was required on weapons from the US to boost the US economy

c)   How much WWII cost in total for all combattants to revive economic activity

d)   How long it took to pay down the debt mountain

Yen Cross's picture

 The usd/jpy is looking Fugly...  If 99.50 and the 38.2% Fibi go, it's gonna get nasty.

PAWNMAN's picture

Not sure if the media was quite the propaganda arm for the government that it is now. That fact enable this lie to be projected much further into the future.

MarsInScorpio's picture

After a lifetime writing for, and managing, first–tier publications, allow me to respectfully interject some thoughts:


1) Today’s journalists are victims of the dumbed-down education system. They lack historical perspective, cultural understanding, class (meaning social status) experiences, and real world immersion.


That is why a pathological liar like Jay Carney can talk about the Libyan murders as “a long time ago” and not get laughed off the podium – the timeline perspective (so-called news cycle) has shrunk into daily multipart segments with the accompanying short-term attention span.


The up-and-coming 20- and 30-somethings along with their 40-something editors and publishers are clueless about how today’s events are just replays of former events – the “nothing new under the sun” effect.


Add to that their erroneous belief that they are members of the ruling elites (as if any of them are included in the 0.6% that owns 39.3% of all global assets). Because they get to be in the presence of some of that 0.6%, so they think they are part of the club.


They are delusional fools who are just as narcisstic and psychotically sociopathic as the Looney Tunes pulling the strings. This explains why so much of what you read makes you shake your head and wonder how they could be such idiots.


2) The media is a corporatist institution. As such, journalists know to tow the party line, or face unemployment and blacklisting. Look at Glenn Beck.


Ever wonder why gays – less than 15% of the population - can receive so much attention? It’s because journalists are not going to clash with their gay editors. It’s as simple as that.


Wonder why Black Racism is the Denialists poster child? Because a) some affirmative action Black is riding at the top of the food chain – and will axe you in a heartbeat if you mention it; and b) Blacks have nearly completed the takeover of the entertainment industry – which means Hollywood and music are now going to turn out anti-white movies and songs with impunity.


And these journalists aren’t going to say a word because they know their career is over – once they are labeled a racist.


3) Journalists used to know they are there to cover the story – not be the story.


But now they are all seeking celebrity – Twitter, Facebook, journalists interviewing journalists; and in doing so, they have to set themselves up as “experts” even though they lack a single day trading, handling an asset portfolio, and the other “real world immersion” events that differentiate parrots from professors.


They just repeat whatever they are told, and go with it themselves because some celebrity interviewee said so. Think of it as expertise by association.


And a final note to understand today’s journalist: they like to be liked by whomever they are covering. Why do you think the White House Whore Corps yucks it up with whoever is the president? Why do you think they drink themselves into oblivion with Hillary – who drinks herself into oblivion (a la Maureen Dowd . . .).


Aside: Do you know the real reason Barrack and Hillary were nowhere to be found during the attack in Libya?  Because both were snot-slinging drunk and incapable of reacting to the crisis. Just ask the journalists who were snot-slinging drunk with them . . .


I hope this lends some “been there, done that” perspective to the conversation.



Westcoastliberal's picture

Excellent summation!  I can't disagree with a word you wrote.

caimen garou's picture

stock market up, welfare at all time highs! now there is a recovery! oh yes we can!

CDNX fan's picture

NEVER understimate the replacement power of equities within an inflationary spiral.

asteroids's picture

Where it not for POMO Tuesdays. The SPY would probably be below 1000.

TrustWho's picture

Over 50% of the american people worked on farms, many small farmer-owner operated because commodity prices crashed from early 20's. A significant number lost their farm. Fathers, brothers, uncles, cousins provided many an opportunity to work on their farms. In rural America, the Great Depression had started by 1929, but few noticed.

When the financial crisis struck in Fall 1929, the soup lines were visible. Today's small farmer-owner operated businesses are the small main street businesses. These businesses have been struggling since 2008/09. Many are failing, go to local strip mall and count the empty shells, and almost all continue to struggle significantly below 2006/07's peak profit levels. I see small business P&L's every day.

As all ZHers know well, we are witnessing record food stamp usage. My point, because of the Fed's can kicking creating an facage, we are in the like Great Depression period prior to Fall of 1929. Families that will be economically destroyed have NO fathers, brothers, uncles, and cousins who have farms where they can work and help thie family survive. The world TURNS! 


fijisailor's picture

The only way for a recovery to truly work is to clean out the corruption.  TPTB never figured this out and so we will continue indefinitely until it happens.  Cronyism will never motivate people to start a new dynamic economy.

americanspirit's picture

The Department of Homeland Security is standing by to provide LOTS of farms where destitute city folks can work - for three hots and a cot - and don't get too close to the electric fence or the guys in the towers will get nervous.

Shizzmoney's picture

The Politicians need to repeat after me:







The problem is these assholes sit in Congress and trade insider information, and as long as they can do that, they will think the opposite of the above.

I mean, Eric Cantor shorted Treasuries (at the behest of Goldman Sachs).  How is that NOT treason?


laomei's picture

When congress inside-trading is legal, and corporate profits mean more bribes, it sure as hell does mean that to all those who hold any power.

thestarl's picture

Abenomics...last flare from the shipwreck.

the grateful unemployed's picture

the stock market leads the economy according to bob prechter which he attributes to collective psychology (tinfoilhat) rather than its use as a tool of economic gerrymandering. the wealth disparity gap was there in the 30's, americas always been the destination of choice for scam artists, con men and grifters. now they just go straight to washington dc. 2008 was the year the cockroaches came out in the light, and called their activity economic policy. they hired some regular guy to make speeches for the poor, while the rich got richer. to sell you mandatory insurance as healthcare reform, and to quietly keep the forever war going for the munitions makers. the other party will sell out its poor red state constituents just as quickly. ww2 didn't end the depression but it did give the working class a chance to prosper by killing other working class brothers in far away lands. now of course the working class is in a museum, and your only right to an income, your job, is history. so technically they don't have to give you anything. and your retirement in is their hands (stocks bonds and paper assets) and without the backstopping of THEIR assets, your retirement wouldn't be worth anything. W Bush called it the "home ownership society", but in the end it turned out to be the renters society. Obama would call it the "stock ownership society", but the result will be the same. you won't own anything, and you've still be waiting on their handouts until you leave this mortal coil. 

Shizzmoney's picture

I'm really starting to come around to the fact the "handouts" only exist to a) keep the populace from revolting b/c b) the plutocrats uses the idea of giving the plebs handouts so they can argue they should get handouts as well (that are 100x's more).

bluskyes's picture

Exactly! Revolutions are not fought on full bellies.

graspAU's picture

I've been using the term "anti-riot payments" for some time. At some point the payments are so nice, that productive people that have 50-70 hour work weeks will ponder, is it worth all the hard work to provide transfer payments and maybe get on the recieving end of the transaction (until the whole shell game implodes).

johny2's picture

it is possible to make it seem for a while as if inflation is under control. but still we are watching end of the empire happen.

Money 4 Nothing's picture

Great article. 




Mandel Bot's picture

Banksters are mistletoe on the oak of the economy

orangegeek's picture

1930s was the start of "The New Deal".


Today we are at the end of this piece of shit legislation.



TrustWho's picture

Did you watch "V for Vendetta"? If not, you should because we all need to reflect on the image we see in the mirror.

Where can we find a Patrick Henry who told the VA legislators (much paraphased): "Yea, if you vote "Yes" for this legislation, the British may kill you. If you vote "NO", you will be a slave. Is life so precious? For me Give me liberty or Give me death."

Many people who gave this country its freedom, DIED at the hands of those who wanted no change. Can you imagine how MSNBC would describe Patrick Henry if he stated those words today. I can not imagine, because the venom would be running deep.

socalbeach's picture

CNBC takeaway from this article:  We're going a lot higher folks.  Buy!!!

"The Dow ended the first quarter of 2009  at 7,600 (after an intra-quarter low of 6,500). At the end of May 2013, the Dow closed at 15,100. The difference between these two closes represents an increase of 99%... The stock market closed at 72 in the second quarter of 1932 and hit a high of 195 during the first quarter of 1937.  That return dwarfs our puny recovery, representing a return of 171%."