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1907 Dow Panic vs 2008 Financial Crisis

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    November 1, 2011

    During the summer I posted a set of charts illustrating the dramatic market behavior during the Panic of 1907 and the Financial Crisis of 2008. A century separated these two momentous market episodes, and the underlying causes were quite different. However, the overall volatility and general patterns of decline and rally are remarkably similar. In response to a request, I’ve updated the charts through October 28.

    The first chart is a nominal view of the two periods showing the percentage declines over time from their peaks in 1906 and 2007.



    Now let’s adjust for inflation, which had a significant impact on the earlier period. During the first half of the 20th century, episodes of high inflation and deflation were commonplace. See this chart for an illustration of those early inflationary/deflationary cycles.



    Was the 1907 low the historic bottom for the Dow? Unfortunately, no. The secular bottom occurred nearly 15 years later — a year after Germany signed an armistice with the Allies to mark the official end of World War One.



    Both periods involved a financial crisis. The pre-Federal Reserve 1907 Bankers’ Panic was dampened by a bailout of the system by J. P. Morgan, who put up his own money, and persuaded other New York bankers to do likewise. The Federal Reserve has introduced a number of tactics to shore up the modern banking system. Naturally there are many differences between the two eras. But one inference we can make from the earlier period is that secular bear markets can last for very long periods of time.

    In fact, when did the real Dow permanently regain the 1906 high? In September 1985 — a few months shy of 80 years later.



    Of course, investors had many opportunities to create wealth in the market over those eight decades. The bottom in 1921 was followed by the Roaring Twenties. And even during the Great Depression, dividends in the vicinity of 5% were coveted source of income. A few years after World War II, the secular bull market that began at mid-century would provide a sound opportunity for wealth creation.

    Bottom line: Bear markets run their course and the Bull eventually returns. But history tells that, especially during those secular declines, patience and risk management are definite virtues.


    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.