Just how dreadful for stock markets has this decade been? For the US, still by far the world's biggest stock market, the noughties saw worse performance than the depression-hit 1930s, making this the worst decade since equity markets have existed in their recognisable current form.
In real terms, the S&P 500, the most widely used benchmark of US stocks, fell 30.4 per cent in the 1930s. On the eve of the Christmas break this year, it had fallen by 37.5 per cent since the beginning of 2000. There are caveats: the bear market of the 1930s started in October 1929, while the current bear market started just after the beginning of the decade, in March 2000, when the technology bubble burst. Also, the serious deflation of the 1930s boosted stocks' performance in real terms, as they could fall in value and still maintain their buying power. But the bottom line remains that, from the perspective of stock markets, the two decades look very similar, even if the 1930s saw much greater pain in the real economy.
The key difference may lie in policy decisions. Both began with a collapse in asset prices following a speculative frenzy. In the 1930s, politicians let the market take its knocks, and a banking crisis ensued, followed by the Depression. Mindful of this precedent, the Federal Reserve cut interest rates aggressively in 2001, while politicians offered tax cuts. The result was that stock markets were able to rebound in early 2003, even though long-run metrics suggested stocks were still far more expensive than their historical average. Arguably, this merely postponed the inevitable and made the reckoning worse when it came. Cheap rates to stave off the equity sell-off also nurtured the financial engineering that allowed lenders to offer credit at artificially cheap rates.