Defining a Depression: Myths and Facts

Yikes: Did it really take 25 year for the stock market to recover its losses?


How on-spot are all these comparisons between the Great Depression and the current recession?

Let's start with how you define a depression. Interestingly, there's no formal definition, Calculated Risk points out today, but many experts agree that it's a prolonged slump with a 10 percent or more decline in real GDP. However, there's disagreement over the definition of a "prolonged slump." CR concludes that while this recession is exceptionally nasty, it's only about one-third of the way to a depression (see charts that back his analysis.)

More analysis of what makes a depression comes from Mark Hulbert via Barron's. He dispels three myths:

1. "It took 25 years for the stock market to recover its losses from the high reached just before the stock market crashed in October 1929." Hulbert (referencing Jeremy Siegel): When you take inflation and dividends into account, it took less than eight years. Another big factor that explains the gap: IBM was removed from the Dow.

2. "If we're playing out a 1930s script, now would be a bad time for long-term investors to get into the market." Hulbert (again citing Siegel data): "if the stock market were to exactly adhere to a 1930s-like script, equities would provide a handsome return over the next five years."

3. "The stock market's recent extraordinary volatility provides a clue to the wild ride that lies ahead if we're playing out a 1930s-like script." Hulbert: Recent volatility doesn't hold a candle to Great Depression-era volatility (here's why.)

Want to hear more? Here's why Morgan Stanley's economics team firmly believes the Great Depression comparisons are misplaced.