Friday, July 1, 2011

Stock prices and pre-WW2 recessions

- by New Deal democrat

This continues my look at leading indicators as they may apply to pre-WW2 deflationary recessions. I have already looked at BAA bonds, housing starts, and commodity prices. Stock market prices, in the form of the S&P 500, of course are part of the modern set of LEI. How did they perform in the Roaring Twenties and Great Depression? Let's have a look.

Here is a graph of the DJIA (the S&P 500 wasn't created until later) during the Roaring Twenties:

The 1920-21 recession was very much like the 1981-82 recession. High inflation during WW1 was broken via a deep but short-lived bust. Thereafter while the stock market did accurately top and bottom before the peak and trough of the 1923 recession, it rose right through the 1926-27 recession and infamously topped in September 1929 after the downturn that became the Great Depression had already begun.
For a more detailed look, here is a chart of the yearly highs and lows of the DJIA, with the date of those highs/lows in parenthesis, compared with recession dates:

YearYr. high (date)Yr. low (date)Recession dates
1920108.76 (Apr) 66.75 (Dec) 1/20-
192181.50 (Dec) 63.90 (Aug) - 7/21
1922103.43 (Aug) 78.59 (Nov) -
1923105.38 (Mar) 85.76 (Oct) 5/23-
1924120.51 (Dec) 88.33 (May) -7/24
1925159.39 (Nov)115.00 (Mar) -
1926166.64 (Aug) 135.20 (Mar) 10/26-
1927202.40 (Dec) 152.73 (Jan) -11/27
1928300.00 (Dec) 191.33 (Feb) -
1929381.17 (Sep) 198.69 (Nov) 8/29-
1930294.00 (Apr) 157.51 (Dec) cont.
1931194.36 (Feb) 73.79 (Dec) cont.
193288.78 (Mar)41.22 (Jul) cont.
1933108.67 (Jul) 50.16 (Feb) -3/33
1934110.74 (Feb) 88.57 (Jul) -
1935148.44 (Nov)96.71 (Mar)-
1936184.90 (Nov) 143.11 (Jan) -
1937194.40 (Mar) 113.64 (Nov) 5/37-
1938159.51 (Nov) 96.95 (Mar) -6/38
1939155.92 (Sep)121.44 (Apr) -
1940152.80 (Jan)111.84(Jun) -

The DJIA did make a trough in 1932 before the end of the contractionary part of the Great Depression, and did both peak and trough before the economic peak and trough of the 1937-38 recession.

Of the 9 total economic peaks and troughs in this period, the DJIA was a leading indicator 5 times, coincident 2 times, and missed one recession altogether. In short, useful but not perfect.