A Visit To The "Great Depression" 
(New Article Each Month

When one thinks about the Great Depression ,( the period of time from the stock market crash of October 1929 to the onset of World War II on December 7th,1941) one cannot help but picture "black & white" newsreel films of long lines of people waiting in soup lines. Other images conjured up include those of bank runs, similar to that seen in the Jimmy Stewart movie "It's A Wonderful Life". To those of us who did not experience the Depression first hand, it would seem that for the entire 1930s nobody ever smiled, flowers never bloomed, and the sun never shined. I believe that for younger generations who did not live at that time, that the Depression has taken on a "larger than real life" legend. 

Now I won't argue against the fact that the Depression was one of the most trying times in American history. However all was not always doom and gloom, even for investors. A review of the investing history of the 1930s is in order, especially in lieu of the fact that we have recently experienced the worse Bear Market since that era. Could money be made even in the Great Depression? 

Economically, unemployment briefly spiked up to nearly 25% in 1932, but for the entire Depression, unemployment averaged 10%, a figure that has been reached in more modern times, even as recently as the early 1990s. In the 30s newspapers routinely ran several pages of Help Wanted ads (though they often were not the best paying of jobs). The sun did shine, life was lived in Living Color, people went to baseball games, fell in love, and ate hot dogs! 

However, what is  fascinating is that there was indeed money to be made by equity investors in the 1930s! Here is a brief review of the events of the period.....

After reaching a high of 381.1 in October 1929, the Dow Jones Industrial Average collapsed to a low of 41.2 by the Spring of 1932. This represents a loss of  89.18% ! The market had a Price Earnings Ratio (PE) of infinity, as Dow Jones Industrial Average did not have any earnings! Things had to look pretty tough to any investor. 

The performance of the next 5 years is amazing! From that low of 41.2, the Dow climbed to 194.4 by 1937! This is a gain of more than 4.71 times off of the bottom! This occurred while  the following historically relatively high Price Earnings Ratios were recorded ....1932 &1933 Infinity, 1934 - 25.1, 1935 - 18.9 , 1936 - 16.1, 1937 - 14.5.  

With much talk today about stocks having a high historic PE ratio in spite of the super Bear Market of the last 3 years, we should take note of the 1930s. Price Earnings ratios become distorted during severe economic contractions. In a normal market, a decline in prices would result in a lower price/earnings ratio. A low P/E would then be viewed as generally bullish. The 1930s and today are different. The pullback and economic decline of both the Depression and of recent years reduced earnings at an extremely abnormal rate. In fact, earnings have become more depressed than even the stock prices. In such environments, the Price Earnings ratio becomes less meaningful. Equities can rise substantially in such distorted economic circumstances. 

It took 25 years from 1929 to 1954 for the market to once again make a new high. However, as we have noted above, tremendous opportunities existed for trading within this long term secular bear market. Through the use of a defined mathematical trading strategy, such  as practiced by Lussenheide Capital Management, one can take advantage of the opportunities inherent in such economic eras. 



Copyright 2003 Lussenheide Capital Management