Tuesday, September 8, 2009

Dividends, Earnings, and Stock Price Trends have Tracked the Great Depression

Most people have seen Doug Short's charts comparing stock price trends during this bear market with past episodes. However, I haven't seen the same comparison done for dividends and earnings and was curious to see the result. I put the following charts together primarily with Robert Shiller's stock market data, though I added in the operating earnings data for recent years from the official Standard & Poors S&P500 earnings spreadsheet. Stock prices use only a single data point for each month so these charts may differ a little from those that use daily stock price data.

Stock Price, Earnings, and Dividend Trends During the Great Depression

(click on chart for a larger version in a new window)

Leading up to the Great Depression, the stock market's peak value was in September 1929. The value of stock prices, earnings (12 month trailing), and dividends depicted in this graph are all relative to their value in September 1929, so the relative decline of each from that date is visible (earnings and dividends rose slightly after September 1929 before declining). My observations:
  • It is remarkable how closely the decline in prices tracks to the decline in earnings! However, the chart is a little visually deceptive since the lower the values are on the chart, the larger the percentage difference between the lines at that point, e.g., the gap in blue (price) and yellow (earnings) lines in mid 1932 is larger on a relative basis than gaps higher on the chart.
  • Also of note is how the decline in dividends lags the decline in earnings, with dividends ultimately bottoming out 55% below their peak value versus a larger 75% fall in earnings.

Stock Price, Earnings, and Dividend Trends in Recent Years (US)

(click on chart for a larger version in a new window)

The recent stock market peak was in October 2007. As with the previous graph, stock prices, earnings (12 month trailing), and dividend values are relative to their value in October 2007. My observations:
  • Just like during the Great Depression, it is remarkable how closely stock prices track to earnings! However, they have tracked operating earnings and seemingly completely ignored reported earnings. It appears that the push by Wall Street to focus on operating earnings (which exclude many supposedly "one time" charges, write-downs, etc) over reported earnings has been quite successful with respect to investor behavior. The gap between operating and reported earnings has grown significantly over the years so operating earnings are controversial.
  • Reduction in dividends again lags reductions in earnings.
  • As of Q2 2009, stock prices have jumped above the earnings trend "track" by the largest amount yet. Interestingly this occurred when reported earnings rose slightly even while operating earnings declined, so perhaps the market simply chooses the most optimistic of the two! Of course the changes this spring in accounting rules (with less mark to market) may have made quite a difference in earnings in 2009 and I'm not sure whether anything comparable happened during the Great Depression.

Stock Price, Earnings, and Dividend Trends Today versus the Great Depression (US)

(click on chart for a larger version in a new window)

This chart combines the previous two onto a single overlapping time-line, with all recent values relative to October 2007 values and all Great Depression values relative to September 1929. The lines are color coded to reduce confusion a little — red for dividends, green for earnings, and blue for stock prices, with the darkest of each color representing the data during the Great Depression. My observations:
  • While Doug Short's charts have already shown the similar stock price trend now compared to the Great Depression, the recent trend in dividends and earnings is amazing similar to the Great Depression trend as well! (At least if one compares operating earnings today with reported earnings back then, since operating earnings did not yet exist).
  • While anything could happen in future months, the current trajectory of dividends (down 11% from peak) is looking slightly steeper than the Great Depression decline. Since reported earnings have fallen so severely even relative to the Great Depression, and reported earnings are a closer representation of actual cash flow than operating earnings, the downward pressure on dividends seems like it should be much greater than during the Great Depression — unless reported earnings can stage a miraculous recovery. Is there a reason I'm not aware of why this conclusion is wrong? If correct, bonds may look increasingly attractive relative to stocks for income-seeking investors.

Stock Price/Earnings Ratio Trend during the Great Depression versus Today (US)

(click on chart for a larger version in a new window)

Stock Dividend Yield Trend during the Great Depression versus Today (US)

(click on chart for a larger version in a new window)

Closing Thoughts

To me, the clearest value in these charts is yet one more piece of evidence that this recession/depression is very comparable to the Great Depression, despite the claims of many people that this period is "nothing like the Great Depression." And I did check the data for the years since WWII and found no other dividend declines near as large as today's, so this is not a normal recession pattern. That said, these charts say nothing about the future and what will result from current government stimulus and any structural economic differences that may be relevant. Stock prices, earnings, and dividends could immediately start heading sustainably higher and break from the Great Depression trend, or they could keep heading down. My personal view is that the downside probabilities are much higher than the upside ones (with flat being another feasible path somewhere in between), but everyone needs to make their own determinations and none of this is investment advice.


  1. "Stock prices, earnings, and dividends could immediately start heading sustainably higher"

    You mean the 50% rally so far doesn't count?

  2. As time passes it will be interesting to see if dividends follow operating earnings or reported earnings which have diverged given all the accounting gimmickery lately. I guess cash flow will dictate, it's tough to game that!

  3. nice charts... you also have to consider that the dollar was pegged to gold pre-1971. Maybe a chart of stock prices to gold or DXY would show larger declines from the peak apples to apples.