This continues my look at potential leading indicators as they may apply to pre-WW2 deflationary recessions. I have already looked at BAA bonds, housing starts, commodity prices, the stock market, the yield curve, and money supply. Today I will look at bond prices generally.
Laksham Achuthan of ECRI is on record saying that their index does not make use of the yield curve. On the other hand, they may make use of information from the bond market. One little-known source of this information that goes back at least to the 1890s is the Dow Jones Bond Average (renamed the DJ Corporate Bond Average about 15 years ago). The DJBA consists of 30 bonds of varying types and maturities, and was designed to give an overall view of the bond market. Its value is and has always been computed daily.
I would love to be able to show you a simple graph covering the pre-WW2 era, but I've never been able to find one. Entering the daily or even monthly prices would take more time than I have available for this exercize, but what I can do is give you the below chart which shows significant highs and lows from 1920 through 1940. Where there are no entries, the up or down trend continued from the last chronological entry. Note that sometimes the yearly low in the right column comes before the yearly high in the left column. The most significant highs and lows are bolded:
| Year | High | Low | Recession dates |
|---|---|---|---|
| 1920 | 81.40 Jan | 71.64 May | - | 1921 | 84.13 Dec | - 7/21 |
| 1922 | 92.12 Sep | - | |
| 1923 | 85.77 Mar | 5/23- | |
| 1924 | 91.32 Apr | -7/24 | |
| 1925 | 91.20 Apr | - | |
| 1926 | 95.52 Jun | 94.69 Oct | 10/26- |
| 1927 | -11/27 | ||
| 1928 | 99.48 Jan | - | |
| 1929 | 96.32 Jan | 91.76 Sep | 8/29- |
| 1930 | 97.68 Sep | 92.83 Dec | cont. |
| 1931 | 96.76 Jan | cont. | |
| 1932 | 83.26 Aug | 63.78 Jun | cont. |
| 1933 | 89.07 Jul | 73.21 Mar, 78.62 Nov | -3/33 |
| 1934 | - | ||
| 1935 | - | ||
| 1936 | 106.01 Dec | - | |
| 1937 | 5/37- | ||
| 1938 | 83.39 Mar | -6/38 | |
| 1939 | 92.22 Mar | 83.06 May | - |
| 1940 | 91.01 Dec | - |
The most important conclusion is that the DJBA did accurately lead all three of the big recessions in the era - the 1920-21 recession (which was similar to the 1981-82 recession in that it killed the WW1 inflation), the 1929-32 collapse, and the 1937-38 deep recession.
Of the five recessions, highs in the DJBA preceded the 4 onset in our period by 8, 4, 19, and 5 months. The 5 troughs were preceded by 12, 16, 13, 9, and 3 months. Note that for the first year of the Great Depression, bonds did not decline steeply. Only after the depression deepened severely did they cliff-dive.
At the same time, this fits very well with the DJBA or a similar bond average being a "long leading indicator" in ECRI's model.
