How Did the US Stock Market Perform During the 1918 Spanish Flu Pandemic?

During the 1918 Spanish Flu Epidemic, the first wave of deaths hit its peak of 5 deaths per 1,000 persons in July of 1918. It subsided in August and remained that way for the rest of the summer. Come Fall of 2018, a second and much more lethal wave hit, peaking just below 25 deaths per 1,000 persons in November of 2018. This wave subsided to more normal levels during winter. Then a third wave of deaths hit in February of 2019, lasting until May of that year. About 28% of the US population were infected during this period, leading to an estimated 500,000 to 675,000 deaths (0.48 to 0.64% of the population).

Surprisingly, the stock market during this time period remained remarkably stable. It did not crash. The Dow Jones Indusrial Average Index (DJIA), which was the only US stock market index to exist at that time, shows that the market remained relatively flat throughout 1918 and then soared by almost 50% by the end of summer of 1919.

The DJIA is a price-weighted index that measures the stock performance of the 30 large companies listed in the US stock market and is therefore not representative of the broader market.

The S&P 500 Index is broader-based stock market index because it includes at least five hundred of the largest publicly listed companies in the United States. The S&P 500 is a capitalization-weighted index and not price-weighted. It is constructed by combining the market capitalizations of all the component companies. However, the S&P 500 Index only came into existence in 1957. It did not exist in 1918. So how do we gauge the broader market performance of that time.

Enter Finance Professor Robert Shiller of Yale University has a data set which presents the "US Stock Markets 1871 - Present and CAPE Ratio," which reconstructs or estimates what the S&P 500 Index would have been during the Spanish Flu Pandemic using data on the stocks being traded in the US stock market at that time.

The reconstructed S&P 500 Index showed that the broader stock market did soar not just in 1919 but starting in 1918, when the first wave of the pandemic hit.

So, what gives? Why did it soar?

Simple. The economy soared too. Real GDP soared by 9.02% in 1918, then dropped to a measly growth rate of 0.80% in 1919, according to economists Reinhart & Rogoff.

Why did GDP by 1918 in the midst of a global pandemic? Because the US entered World War I in April 1917 and spent billions on military preparations.

The data from the White House website tells it all.  Government spending soared by 549% in 1918, from just 3.27% of GDP in 1917 to 16.72% of GDP in 1918.

 

Year	Total US Government Revenues and Outlays
	Receipts	Outlays	Surplus or Deficit (-)	Outlays as % of GDP
1914	725	726	-*	1.99%
1915	683	746	-63	1.93%
1916	761	713	48	1.44%
1917	1,101	1,954	-853	3.27%
1918	3,645	12,677	-9,032	16.72%
1919	5,130	18,493	-13,363	23.62%
1920	6,649	6,358	291	7.19%
1921	5,571	5,062	509	6.88%
1922	4,026	3,289	736	4.48%
1923	3,853	3,140	713	3.68%

Source: Whitehouse.gov and Reinhart & Rogoff

The bulk of the increased outlays were for military spending itself. Expenditures soared from just $546 million in 1917 to $7.05 billion in 1918. It drafted 2.8 million men to fight the war in Europe. By the summer of 1918, it was sending 10,000 fresh soldiers to France every day. World War I lasted until November 1918 at the height of the pandemic. When the war ended, so did expanded military spending and GDP growth dropped off considerably.

The economy was kept humming at a brisk pace, unhampered by the lack of quarantines, allowing the pandemic to grow and spread, leading to many more millions of unnecessary deaths. In other words, public health officials did not flatten the curve so as not to cripple the war effort.

Obviously, not flattening the curve today is not possible. It would be political suicide for any government official to let the pandemic run wild.

One obvious lesson we can take away is that massive government intervention, not necessarily in the form of miltary spending, can keep the economy humming, if not soaring, in the midst of a global pandemic. Even Ken Rogoff, known for his hawkish views on government debt, seems to think so.

I mean, there's never been a concern about our government's defaulting. The concern is being able to borrow massively when you need to. That's the whole point of saving for a rainy day. When it rains, you want to really open up the floodgates.

And, here, I just — there's no limit. We're in a war. You have to win the war. I would have no problem with the government debt magically going up $5 trillion in the blink of an eye, if we could get out of this in two or three months healthily.

This is an emergency. You're not worrying about your credit standing right away. I don't think that's going to a problem. And you know what? If we have inflation at the end of this, so what, if that is what we needed to do to win this war. We're trying to protect the American people, protect our interests, protect the future.

This is really — think like World War II, World War I. It's this — tiny little viruses invading us, but you know, make no mistake, this is like a war, an alien invasion.

Maybe we should do the same thing in 2020. Goverment has to step in and pick up the economic slack or we will fall into an economic, financial, and political abyss.

Great Depression vs. Great Recession GDP Growth Rates - Updated As of the Fourth Quarter 2016

In March 2015, two illustrious economists, both Former Fed Chairman Ben Bernanke and Former Treasury Secretary Larry Summers have been duking it out on the blogosphere about secular stagnation.  In layman's terms, both are attempting to describe why does the US Recovery from the Great Recession feel so sluggish.

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough in real terms and -0.4% in nominal terms) and took place over two years (2008 to 2009), the recovery in the seven years since then has been very anemic.  The economy reached parity with its pre-recession peak GDP in nominal terms in 2010, only three years after the Great Recession started in December 2007.   In real terms, it took an additional year, by 2011, to reach parity with its pre-recession peak.  By the 4th Qtr of 2016, the US economy is only 30.81% larger, in nominal terms, than the bottom in 2009, averaging only 3.91% growth every year since the Great Recession bottomed out. In real terms, the US economy is only 16.41% larger than the bottom in 2009, averaging only 2.19% growth every year since 2009.

The overall economic contraction during the Great Depression was much more severe (-46% in nominal terms and -27% in real terms from peak to trough) and took much longer (four years from 1930 to 1933).  In real terms, economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years after the 1933 bottom for the US economy to reach parity (in real terms) with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the four years since the US economy bottomed out in 1933, the US economy was 43.5% larger than the bottom in 1933, averaging 9.44% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Great Depression vs. Great Recession

Great Depression vs. Great Recession GDP Growth Rates - Updated As of the Third Quarter 2016

In March 2015, two illustrious economists, both Former Fed Chairman Ben Bernanke and Former Treasury Secretary Larry Summers have been duking it out on the blogosphere about secular stagnation.  In layman's terms, both are attempting to describe why does the US Recovery from the Great Recession feel so sluggish.

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough in real terms and -0.4% in nominal terms) and took place over two years (2008 to 2009), the recovery in the seven years since then has been very anemic.  The economy reached parity with its pre-recession peak GDP in nominal terms in 2010, only three years after the Great Recession started in December 2007.   In real terms, it took an additional year, by 2011, to reach parity with its pre-recession peak.  By the 3rd Qtr of 2016, the US economy is only 29.52% larger, in nominal terms, than the bottom in 2009, averaging only 3.76% growth every year since the Great Recession bottomed out. In real terms, the US economy is only 16.41% larger than the bottom in 2009, averaging only 2.19% growth every year since 2009.

The overall economic contraction during the Great Depression was much more severe (-46% in nominal terms and -27% in real terms from peak to trough) and took much longer (four years from 1930 to 1933).  In real terms, economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years after the 1933 bottom for the US economy to reach parity (in real terms) with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the four years since the US economy bottomed out in 1933, the US economy was 43.5% larger than the bottom in 1933, averaging 9.44% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Great Depression vs. Great Recession

Great Depression vs. Great Recession GDP Growth Rates - Updated As of the Third Quarter 2016

In March 2015, two illustrious economists, both Former Fed Chairman Ben Bernanke and Former Treasury Secretary Larry Summers have been duking it out on the blogosphere about secular stagnation.  In layman's terms, both are attempting to describe why does the US Recovery from the Great Recession feel so sluggish.

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough in real terms and -0.4% in nominal terms) and took place over two years (2008 to 2009), the recovery in the seven years since then has been very anemic.  The economy reached parity with its pre-recession peak GDP in nominal terms in 2010, only three years after the Great Recession started in December 2007.   In real terms, it took an additional year, by 2011, to reach parity with its pre-recession peak.  By the 3rd Qtr of 2016, the US economy is only 29.35% larger, in nominal terms, than the bottom in 2009, averaging only 3.75% growth every year since the Great Recession bottomed out. In real terms, the US economy is only 15.95% larger than the bottom in 2009, averaging only 2.14% growth every year since 2009.

The overall economic contraction during the Great Depression was much more severe (-46% in nominal terms and -27% in real terms from peak to trough) and took much longer (four years from 1930 to 1933).  In real terms, economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years after the 1933 bottom for the US economy to reach parity (in real terms) with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the four years since the US economy bottomed out in 1933, the US economy was 43.5% larger than the bottom in 1933, averaging 9.44% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Great Depression vs. Great Recession

Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"

Great Depression vs. Great Recession GDP Growth Rates - Updated As of Second Quarter 2016

In March 2015, two illustrious economists, both Former Fed Chairman Ben Bernanke and Former Treasury Secretary Larry Summers have been duking it out on the blogosphere about secular stagnation.  In layman's terms, both are attempting to describe why does the US Recovery from the Great Recession feel so sluggish.

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough in real terms and -0.4% in nominal terms) and took place over two years (2008 to 2009), the recovery in the five years since then has been very anemic.  The economy reached parity with its pre-recession peak GDP in nominal terms in 2010, only three years after the Great Recession started in December 2007.   In real terms, it took an additional year, by 2011, to reach parity with its pre-recession peak.  By the 2nd Qtr of 2016, the US economy is only 27.87% larger, in nominal terms, than the bottom in 2009, averaging only 3.57% growth every year since the Great Recession bottomed out. In real terms, the US economy is only 15.61% larger than the bottom in 2009, averaging only 2.09% growth every year since 2009.

The overall economic contraction during the Great Depression was much more severe (-46% in nominal terms and -27% in real terms from peak to trough) and took much longer (four years from 1930 to 1933).  In real terms, economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years after the 1933 bottom for the US economy to reach parity (in real terms) with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the four years since the US economy bottomed out in 1933, the US economy was 43.5% larger than the bottom in 1933, averaging 9.44% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Great Depression vs. Great Recession



Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"

Great Depression vs. Great Recession GDP Growth Rates - Updated As of First Quarter 2016

In March 2015, two illustrious economists, both Former Fed Chairman Ben Bernanke and Former Treasury Secretary Larry Summers have been duking it out on the blogosphere about secular stagnation.  In layman's terms, both are attempting to describe why does the US Recovery from the Great Recession feel so sluggish.

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough in real terms and -0.4% in nominal terms) and took place over two years (2008 to 2009), the recovery in the five years since then has been very anemic.  The economy reached parity with its pre-recession peak GDP in nominal terms in 2010, only three years after the Great Recession started in December 2007.   In real terms, it took an additional year, by 2011, to reach parity with its pre-recession peak.  By the 1st Qtr of 2016, the US economy is only 26.37% larger, in nominal terms, than the bottom in 2009, averaging only 3.40% growth every year since the Great Recession bottomed out. In real terms, the US economy is only 16.52% larger than the bottom in 2009, averaging only 2.21% growth every year since 2009.

The overall economic contraction during the Great Depression was much more severe (-46% in nominal terms and -27% in real terms from peak to trough) and took much longer (four years from 1930 to 1933).  In real terms, economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years after the 1933 bottom for the US economy to reach parity (in real terms) with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the four years since the US economy bottomed out in 1933, the US economy was 43.5% larger than the bottom in 1933, averaging 9.44% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Great Depression vs. Great Recession


Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"

Great Depression vs. Great Recession: Unemployment - Updated December 2015

The reported unemployment rate during the Great Depression was significantly higher than the reported unemployment rates of the Great Recession.

But are the two rates comparable? Before 1938, children were a significant part of the labor force.  In 1900, children younger than sixteen made up as much as eighteen percent of the labor force.  It was only when the Fair Labor Standards Act of 1938 became law that children younger than sixteen were barred from working in manufacturing and mining but not agriculture.

To make the numbers more comparable, it is better to get the ratio of Employment to the Total Population (which includes children). When we do this, the two measures are not so far apart.  In 1929, the year "0" for the Great Depression, 54.41% of the total population was employed.  By 1933, year "4", only 41.97% of the population was employed. But the rise in employment was dramatic.  Four years later, 47.63% of the population was employed, almost six percentage points higher. The employment momentum only stalled when the tax hikes of 1937 induced another recession in 1938 and new child labor laws barred children from the labor force.  If the momentum had continued, the employment ratio would have recovered in less than five years.


In 2007, the year "0" of the Great Recession, 48.38% of the population was employed.   Four years later, only 44.82% of the population was employed, a drop of less than 4 percentage points.  By December 2015 or four years after the Great Recession bottomed out, only 46.45% of the population is employed, an increase of only 1.63% percentage points.  The growth rate of employment was less than a third that of the Great Depression.  At this rate, it will take five more years before employment recovers to that of Year "0".

Great Depression vs. Great Recession

Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"

Great Depression vs. Great Recession: Unemployment - Updated November 2015

The reported unemployment rate during the Great Depression was significantly higher than the reported unemployment rates of the Great Recession.

But are the two rates comparable? Before 1938, children were a significant part of the labor force.  In 1900, children younger than sixteen made up as much as eighteen percent of the labor force.  It was only when the Fair Labor Standards Act of 1938 became law that children younger than sixteen were barred from working in manufacturing and mining but not agriculture.

To make the numbers more comparable, it is better to get the ratio of Employment to the Total Population (which includes children). When we do this, the two measures are not so far apart.  In 1929, the year "0" for the Great Depression, 54.41% of the total population was employed.  By 1933, year "4", only 41.97% of the population was employed. But the rise in employment was dramatic.  Four years later, 47.63% of the population was employed, almost six percentage points higher. The employment momentum only stalled when the tax hikes of 1937 induced another recession in 1938 and new child labor laws barred children from the labor force.  If the momentum had continued, the employment ratio would have recovered in less than five years.

In 2007, the year "0" of the Great Recession, 48.38% of the population was employed.   Four years later, only 44.82% of the population was employed, a drop of less than 4 percentage points.  By November 2015 or four years after the Great Recession bottomed out, only 46.35% of the population is employed, an increase of only 1.53% percentage points.  The growth rate of employment was less than a third that of the Great Depression.  At this rate, it will take five more years before employment recovers to that of Year "0".

Great Depression vs. Great Recession

Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"

Great Depression vs. Great Recession: Unemployment - Updated July 2015

The reported unemployment rate during the Great Depression was significantly higher than the reported unemployment rates of the Great Recession. 

But are the two rates comparable? Before 1938, children were a significant part of the labor force.  In 1900, children younger than sixteen made up as much as eighteen percent of the labor force.  It was only when the Fair Labor Standards Act of 1938 became law that children younger than sixteen were barred from working in manufacturing and mining but not agriculture.

To make the numbers more comparable, it is better to get the ratio of Employment to the Total Population (which includes children). When we do this, the two measures are not so far apart.  In 1929, the year "0" for the Great Depression, 54.41% of the total population was employed.  By 1933, year "4", only 41.97% of the population was employed. But the rise in employment was dramatic.  Four years later, 47.63% of the population was employed, almost six percentage points higher. The employment momentum only stalled when the tax hikes of 1937 induced another recession in 1938 and new child labor laws barred children from the labor force.  If the momentum had continued, the employment ratio would have recovered in less than five years.



In 2007, the year "0" of the Great Recession, 48.38% of the population was employed.   Four years later, only 44.82% of the population was employed, a drop of less than 4 percentage points.  By July 2015, around four years later, only 46.30% of the population is employed, an increase of only 1.48% percentage points.  The growth rate of employment was less than a third that of the Great Depression.  At this rate, it will take six more years before employment recovers to that of Year "0".

Great Depression vs. Great Recession

Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"