Unemployment, Not the Stock Market, Distinguishes a Recession From a Depression

Claus Vogt writes: What are the most important and enduring characteristics of the Great Depression? And what should we monitor to determine how severe today’s situation really is?

The stock market will give important clues. But the economy, especially unemployment, defines depressions.

That should be obvious. However, after the stock market rallied off its March 2009 low, the media and many pundits seem to be fixated on the financial markets to determine the severity of the crisis and to call its end.

To see if the bulls’ hopeful thinking holds water, let’s go back to 1929 and have a look at the stock market’s behavior during those horrific times …

The Bear Market Rally of 1929/30

Yes, there was a spectacular stock market crash in 1929. But a stock market crash does not a depression make. Remember 1987? There was a very similar crash … but no depression. Not even a mild recession.

The crash of 1929 proved to be only the prelude to further heavy losses in 1930-1932. After the initial crash from 381 to 199, a huge rally emerged. Prices rose all the way back to 294 for a 48 percent bear market rally. Hence initial losses were roughly cut in half!


The stock market crash on Black Thursday, October 24, 1929, was just the beginning of the carnage to hit Wall Street.

Unfortunately, investors didn’t recognize this rally as a selling opportunity. Instead, they listened to the bullish advice of Wall Street pundits and the government’s declarations that the worst was over and prosperity was right around the corner.

As we all know, this optimism proved to be, well, premature. The huge rally turned out to be just a bear market rally … soon the market started to tank again.

First, stocks tumbled back to the crash-lows, where a second and shallower rally emerged. Then after this bout of hope had evaporated, the market cascaded lower for another two years. From the high during the summer of 1929, the losses mounted to a staggering 89 percent.

Now, let’s fast forward to …

The Bear Market Rally of 2009

After having lost more than 50 percent off its October 2007 high, a huge stock market rally started in March 2009. This rally amounted to 43 percent and had all the typical characteristics of a counter trend move. Especially noteworthy was the low and diminishing volume, which is typical bear market rally behavior.

Just as in 1929, this rally led Wall Street and official sources to conjure economic optimism. This is not a coincidence … the stock market and sentiment measures are highly correlated. But rising sentiment does not forecast a betterment of the economy. Instead a rising stock market foregoes rising optimism.

Now it looks like this bear market rally is over …

There is technical support around 880 in the S&P 500. A break below this mark would ignite another sell signal and confirm the end of the rally. The next support level is around 800. If this line doesn’t hold, it’s back to the March lows. And if these lows do not stop the slide, a very important message concerning the economy will have been given: “Depression ahead.”

I think that the next few weeks and months will not only be very interesting, but also very important. Yet hardly anybody on Wall Street seems to think about the possibility of a new, stock market low.

They should. And so should you. Remember …

Employment Is Much More Predictive Of Recessions and Depressions Than the Stock Market …

Since the start of this crisis, world industrial production and world trade have been following the pattern of the 1930s very closely. But unemployment is the most important indicator to distinguish a recession from a depression.

Continued>>>
http://www.marketoracle.co.uk/Article11891.html

anyone seriously believe that the stock market is anything more than a rigged roulette wheel? The stock market is, at this point, totally irrelevant in my view.

The talking heads constantly remind us that we're not in a Depression, because we don't have
Depression-level unemployment.

Yes. It's true. We don't have 28 percent unemployment, as we did during the pinnacle of the Great Depression. However,
the Great Depression didn't start out with 28 percent unemployment.

In fact, when the stock market crashed in 1929--unemployment hovered at around 6 percent.

In 1930, a year after the big crash--GDP falls 9 percent from the previous year--and unemployment
rises to 9 percent.

One year later, in 1931, unemployment rose to 15 percent. In 1932, unemployment hit 27 percent.

That's enough to make me catatonic with fear.

We're on the exact same trajectory. Exactly. Stock market tanks first, unemployment with no job
creation/recovery follows--and unemployment steadily rises.

That's precisely where we are.

Enough with the "lagging indicator" nonsense.

:kick: