This graph compares the daily movement of the Dow following its peak on 3 September 1929 with its movement following its peak on 9 October 2007. As may be seen the decline in the Dow in the current financial crisis is entirely comparable in magnitude, at this stage, to its fall in 1929-32 - this data updates trends analysed in SEB in October.
In order to show that such a severe decline in nominal share prices is a specific feature of the 1929 and 2007 crises, and not typical of any recession, Figure 2 shows a similar graph for the four most serious declines in the Dow in the last century - those starting in 1929, 1973, 2000, and 2007.
For the three earlier declines the data covers the period from the peak price preceding the decline to its low point. The data for the decline starting in 2007 are up to the latest available date - the close of trading on 20 November 2008.
It may be seen that the falls in nominal prices starting in 1973, associated with the oil price increases and recession of that year, and in 2000, following the bursting of the dot com financial bubble, were far less severe than the drops in either 1929 or in 2007.
The fall in real terms following 1973 is understated by this graph, as at that time inflation was far higher than in 1929, 2000 or 2007, while the decline in real terms following 1929 is somewhat exaggerated as at that time the overall price level in the economy was falling. But the differences of order of magnitude are sufficient to make the pattern clear. The fall in nominal share prices following both 1929 and 2007 far exceeds that of any other drop in the last century.
From the angle of share prices it is entirely justified, and without exaggeration, to speak of the present crisis as comparable only to 1929.
The difference between the fall starting in 2007 and that in 1929 is only, at present, the duration of the decline. The decline after 1929 continued for 712 trading days before reaching its bottom on 7 July 1932. The decline following the peak of 9 October 2007 has so far continued for 284 trading days - slightly under forty per cent of the period of the decline following 1929.
Far more prolonged falls in share prices than in 1929 are, however, possible. The Japanese Nikkei, to take the extreme case, was still setting new lows 18 years following its peak at the end of 1989.
For these reasons, to return to the point made at the beginning, there continues to be considerable underestimation of downside risk in share prices in current economic and government policy.
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This article is a shortened version of one which appeared on Key Trends in Globalisation.