Ben Bernanke's Quantitative Easing Vs. The 1940 Fall Of France

In real (inflation/deflation-adjusted) terms, when did the US market permanently regain the high reached in 1929? The first chart illustrates two answers to the question. One uses the real price and the other uses the real total return.

The remaining charts compare market performance since 2000 with the equivalent elapsed time following the peak in 1929. As the final chart shows, the current real total return over the past decade has worse than the performance over the equivalent timeframe during the Great Depression — at least until the past few days. But more about that later.


I’ve used the S&P Composite for this exercise — a splicing of the S&P 500, which was created in March 1957, and the earlier S&P 90 Stock Composite Index, a daily index that dates from January 1928. The chart is based on daily data for the price and the estimated total return (calculated with daily interpolations based on quarterly dividends).

For the S&P Composite, the price didn’t permanently remain above the 1929 peak until December 1985 — over 56 years later. The total return, with dividends reinvested, achieved the same distinction in July 1949, nearly 20 years later.

Will the secular bear market that began in 2000 have the same total-return success when the S&P 500 eventually breaks even? Given the much lower dividend yield over the past decades, the prospects aren’t encouraging.

Let’s look at four charts that overlay two secular bear markets. One is the Crash of 1929 and the Great Depression. The other begins in March 2000 at the top of the Tech Bubble. The first chart shows the nominal price excluding dividends.


The Crash of 1929 was a much steeper decline, but the low in 2009 took us to approximately the same percentage loss as the equivalent period during the Great Depression.

Adjust for Inflation/Deflation

Many people don’t realise that the cyclical bear market that began in 2007 is a continuation of the 2000 bear because in nominal terms the index peak in 2007 was a couple of percentage points above the 2000 high. The next chart adjusts for inflation as measured by the Consumer Price Index. With this chart, it becomes clearer that the Tech Crash was the beginning of a secular bear market that is still ongoing. We also see that, when adjusted for inflation, the low in 2009 actually took the modern market lower than the same point during the Great Depression.


Nominal Total Returns

The next two charts offer comparisons of total returns with dividends reinvested. The first is based on nominal prices (no inflation adjustment). Again we see that the 2009 low was below the comparable period during the Depression era.


Real Total Returns (The Bernanke/Fall-of-France Bit)

The final chart in our series gives the most disturbing comparison of these two epic bear markets. Here we see the total returns adjusted for inflation (or deflation in the case of the earlier period). For most of the past two years, the secular bear market that began in 2000 has substantially underperformed the equivalent timeframe during the Great Depression.

Recently, however, the current market has pulled ahead of the equivalent period in 1940. Why? The rumours and subsequent reality of General Ben Bernanke’s second round of quantitative easing has played to the modern advantage. In contrast that nasty market decline in May of 1940 was triggered by the German Invasion of France.


A Footnote on Inflation/Deflation Adjustment

Since the early days of World War II, with minor exceptions, increasing price levels (aka inflation) have been the standard expectation. Thus the adjustment we make to approximate real prices is labelled an “inflation” adjustment. In prior decades, however, deflation was commonplace, especially during the Great Depression (illustrated here). Thus the counterintuitive result of adjusting for deflation is that the real price is higher than the nominal price. This adjustment, together with the much higher dividend yields during the Great Depression (see this illustration), explains the rather stunning truth that since around the time of the Lehman collapse in 2008, the market has underperformed the matching timeframe of the Great Depression.

Note: These charts offer a comparison of two distinctive market cycles separated by over 70 years. They are not intended as a forecast for the current market.

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