Stock markets matter, and Americans should be concerned about severe market downturns. If you disagree, consider this: There have been eight major bear markets since the start of the Great Depression. All but one contributed to the ensuing — or concurrent — economic weakness, affecting anything from employment to interest rates and prices. A market drop’s ripple effects are widespread.
The stock market has often been described as forward looking — what investors believe will happen in six months. 24/7 Wall St. identified the worst bear markets since the Great Depression. The market drops averaged about 40% each. These undoubtedly destroyed a great deal of individual and corporate wealth, causing a pullback in consumer and corporate spending and, consequently, a rise in unemployment.
When 24/7 Wall St. compared each period of market downturn with national unemployment, gross domestic product and the consumer price index, we indeed found that seven of the eight largest bear markets matched the start of recessions, periods of high unemployment, or sharp inflation.
There is one exception, though. During the course of the Great Depression itself there were two bear markets. The second market drop, from 1939 to 1942, is the only one of the eight after which the economy improved. World War II helped move both employment and GDP higher. None of the other market corrections were accompanied by an event of similar magnitude.
What about the current turmoil? While not a market downturn of the same magnitude, economists have been concerned about the most recent spike in oil prices. The market drops in the early and late 1970s happened at about the time oil prices rose, and therefore, overall consumer prices rose. This smothered consumer confidence and undermined overall consumer activity.
Methodology: 24/7 Wall St. looked at the most severe market downturns, as evidenced by the biggest slide in the Dow Jones Industrial Average, and looked at national unemployment rates from the Bureau of Labor Statistics and GDP per capita from Bureau of Economic Analysis for corresponding years. We then analyzed the historical situations to understand the effects either caused by or corresponding with market downturns.