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Is the Great Depression set to return?

May 15, 2020 By Mircea Vasiu

The recent swings in stock markets in the United States caught many by surprise. As the market volatility increased dramatically, sharp moves have meant traders haven’t been able to adjust their portfolios accordingly.

The market drop from all-time highs was the fastest 30% decline in history. What followed was equally as important. The bounce from the lows defied logic from an economic perspective and resembled what happened  during the 1929 historical crash, that still remains the benchmark for traders and investors today..

Will History Repeat Itself?

A recent study analyzing the market suggests the bottom may not yet be in place. It suggests that equities cannot survive on liquidity alone (i.e., Fed started to buy ETF’s this week). Moreover, if there is no fundamental growth in the economy when the liquidity pool drains, the abyss. Then the current rally should be short-lived.

During the 1929 crash, the stock market rebounded strongly from the initial slump. In fact, it was a similar move, judging by the chart below.

However the same chart reveals what happened after the initial bounce. If we consider the 150 years of bottoming patterns, the stock market is due for a severe crisis.

Yet, there are several factors that tell us this time might be different. That, in fact, there is no connection whatsoever between the two crises.

One thing is the Fed’s support. With little or no inflation, the Fed has all the room it needs to provide liquidity until the fundamentals improve. It can be a month, half a year or more, but investors know the Fed has their back.

Another comes from the current components of the market. Back in 1929, the entire market was more or less focused on similar industries, with little or no divergence in terms of revenue streams and targeted consumers.

Nowadays, big tech rules the world. If before the pandemic Amazon, Microsoft, Google, and others dominated the world, they will continue to do so during the pandemic and consolidate their position after that. Cloud services are only at the beginning, threatening to change the way we handle businesses in the future.

Some may instead of talking about a new crash, may see the 2020 drop as the start of a new era? A reset, where companies that struggled before the crisis (e.g., General Electric) will have a hard time to survive, but new ones, able to ride the new trends, will strive.