Is it reasonable to think that today’s stock market, increasing unemployment rate, and the affect of the subprime mortgage crisis on our banking system will end in a crash like the one in 1929? Is another depression similar to the one in the 1930s likely? Given the recent stock market decline, the increasing unemployment rate, and the weakness in bank balance sheets, a comparison with the 1929 era is both inevitable and warranted. The driving force behind this comparison is the current problems being created by the subprime mortgages.

The foolishness with which lenders, bankers and investors involved in the mortgage process discharged their fiduciary responsibilities is a cause of considerable economic pain to an entire economy. The subprime problem will eventually pass. Excesses have to, and will be, adjusted. That’s an economic certainty. It will probably come to be recognized as the catalyst for the slowdown or recession of 2008. The ultimate length and depth of the slowdown or recession depends on government’s management of the subprime contagion.

Recessions or slowdowns are not a bad thing. They are a normal part of the cyclical economic process. They are the method for disgorging promotional excesses. The historical recovery rate for recessions is 100%. The good news regarding a recession is that when it’s over, the overall quality of life improves.

The differences in the stock market, the real estate market (both commercial and residential) and the state of the economy between 1929 and 2008 described below draw some obvious conclusions. They are: (1) There will not be another 1929 (at least in the foreseeable future). (2) The stock market is not going away. (3) Any further decline in the Dow Jones Average will be fractional when compared to the decline in 1929. (4) The recovery of the Dow Jones Averages to its prior high (12,099) will happen over a shorter period of time than the recovery after 1929 (25 years). (5) Speculative inventory buildup similar to that of 1929 is unlikely. (6) A decline in the gross domestic product comparable to that of 1929 is highly unlikely. (7) An unemployment rate comparable to that of 1929 isn’t going to happen. (8) The banking system will not see similar problems caused by stock market investing, lending or short-term non-amortizing mortgages.

What strategies should an investor consider during 2008? What we don’t know is how long or deep the current economic cycle will last. Terms like strong balance sheet, reasonable leverage, acceptable and usable product(s), current earnings and current yield should represent the majority allocation of every investor’s portfolio. Consequently, staying power and current yield become very important for future investment success. You’ve got to be there when the economy turns, and you should be paid while you wait.

The three critical areas that investors are most correctly concerned about are the stock market, the real estate market (both commercial and residential) and the state of the economy (i.e., recession, depression, employment, inflation etc.).

The following is NetGain’s version of the important differences in circumstances that affected the stock market, the real estate market and the economy in 1929 and 2008.

The Stock Market

The all-time high for the Dow Jones Industrial Average was 14,092. It occurred on October 15, 2007. On January 18, 2008 the Dow Jones Industrial Average closed at 12,099. That’s a drop of 14%. During the market crash of 1929, the Dow Jones Industrials hit a high of 386 during September 1929, a level it didn’t see again until November 1954 (25 years later). At it worst level, the Dow dropped to 40.56 in July 1932. That’s a drop of 89% from the high.

NASDAQ didn’t exist in 1929. NASDAQ’s high was 5048.62 on March 10, 2000. Today (January 18, 2008) it’s 2,709. That’s a drop of 54%.

I won’t regurgitate the dot.com story. It’s been told often enough. Suffice to say, during the 2000 period future values were promoted when present values didn’t exist. Simply stated, when all you have is form over substance, you have a very vulnerable commodity. From its high on March 10, 2000 through January 18, 2008, the NASDAQ has declined 54%. That’s a percentage loss similar to the decline in 1929. NASDAQ has paid its price. There is one obvious similarity between the stock market of 1929 and the stock market of 2008: Both declined. Apart from that, there’s a world of difference between conditions in the two time periods.