A lot of comparisons are being made about the current environment and the 1930s, resulting in even more fear and panic as an unthinkable repeat of that era seems possible. The action of the stock market bears some resemblance to the 1930s, but the policy response is vastly different.
The stock market fell 89% from peak to trough during the Great Depression. Oddly, there were ferocious rallies along the way. Of the 36 days in the last 80 years that saw the market rise 6% or more in a single day, 32 occurred between 1929 and 1933.
In terms of drops, from 1937 to 1941, the market fell 60%. Since then, the two worst bear markets were 1974-1975 and 2000 to 2002. Both were off about 48%.
In 1974, there were more stocks below $10 on the NYSE than above $10. At the intraday low last Friday, the S&P was off 50% from its peak last October. The snapback rally from Friday to Tuesday's intraday high was 1950 Dow points! Such market action has happened in all bear markets.
A peak-to-trough decline of 50% invariably makes you ask the question if this is the beginning of a cataclysmic economic collapse.
In the 1930s, the policy reactions were exactly wrong. The government delayed its response for too long, and the downturn was allowed to entrench itself. And the initial policy moves were incorrect. Money supply shrank by one-third between 1929 and 1933. The thought was to punish the Wall Street speculator and deny him credit for his evil manipulations. Tariffs were raised which chocked off international trade as reciprocal tariffs were imposed. Taxes also were raised.
Today the system is being flooded with liquidity. The Fed's balance sheet started the crisis at about $900 billion and will probably be close to $2 trillion by year's end. Central banks around the world are acting in concert to provide liquidity. The meeting of the G7 yielded a promise to "do no harm" to another nation with whatever your individual countries response was to be. And while taxes are likely to go up with a new administration, they are unlikely to reach the levels of the 1930s.
There was no unemployment insurance in the 1930s, so there was no net to catch the unemployed. Distrust between banks is the problem we face today, but in the Depression, check writing ground to a halt, and cash payments were the norm.
Ben Bernanke's economic background includes much study of the Great Depression. We might argue among ourselves about the speed of some of the policy responses, but the reaction to today's crisis is 180 degrees opposite to the 1930s.
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Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.
Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.
Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.
Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.