The Busts Always Become Booms

In recent weeks Americans have seen the stock market—as measured by the Dow Jones Average—fall from a stratospheric level of over 29,000 to 21,000, including the single biggest “point” drop in history (though not the biggest percentage day drop in history). The old adage, “if ya don’t sell, ya don’t lose money,” proved true once again when just a few days later the Dow Jones shot up by almost 2,000 points in a single day. The markets recovered one-quarter of a 10-day loss in a single day!

What’s going on? What does this say about the American economy?

Not a whole lot, at least in present terms. As the Dow was shooting back up, jobs and employment numbers came in, high . . . and beating all “expectations.” (It seems these numbers always defy the “expectations,” leading me to wonder who the so-called “experts” are who are seemingly always wrong!)

Have we seen this roller coaster before? Yes. While few of us were alive, in 1929 the Great Crash seemed to herald the Great Depression. Actually, economic historians do not draw a connection between the two—it took many other things to turn a cyclical recession into the Great Depression . . . but that’s another story. Yet even after the “Great Crash,” the market regained nearly 50% of its value within a year. And if you looked at the Great Crash today? (See chart). You can’t even find it. It’s barely a blip on the century long history of the stock market. 

Ditto with the 1987 crash, which, again at the time, set records for single-day plunges. Yet it began to recover almost immediately and eclipsed its 1987 highs three years later. Even the home mortgage collapse in 2007-8, which took the market to under 10,000 (or late 1990s levels) did not stay there. It crawled back to previous highs by the end of the decade, then after Donald Trump’s election, started to skyrocket, going from 18,000 to that 29,000 high. Since 2016—even with the recent collapse—it is still 3,000 points above 2016's levels. 

The chart shows with undeniable clarity how strong the American economy is, and how resilient Americans are. Despite three massive crashes in the last century, the market’s trajectory is up, up, up. This is because the United States still has the most powerful economic engine the world has ever seen and its structures, traditions, institutions, and laws still make it the most desirable place to do business on the planet. If history shows anything about the stock market, it is that whatever bust you see today will be followed by an even bigger boom tomorrow!

Larry Schweikart

co-author, A Patriot’s History of the United States

www.wildworldofhistory.com