The Great Depression was worse than the crash of 1981 or 2008 because there were no stabilizing institutions or programs like Social Security, welfare, FDIC, SEC, TARP, QE, etc. so the all-in impact meant that people in distress were in deeper trouble compared to victims of modern day crashes. However, there was one bright, risk reducing spot in the 1930’s: dividends were very high, around 6%. The big yields acted to lower duration of stocks and thus reduce risk. Also in those days people were used to the idea they had to be responsible and take care of themselves. So prudent investors would have parked cash in the least risky banks and in Treasuries before the crash; prudent people would have refused to use margin loans and prepared for the possibility that their 5 year balloon mortgage could come due with no refinancing solution. My point is that a prudent investor in the 1930’s, as a result of doing risk adverse actions and also receiving huge 6% dividends, might not have been in dire straights and this meant the situation wasn’t that risky for those investors. Today’s bulls like to claim that because there is less systemic risk today than in 1933 that means investors are justified in taking on more stock risk, in terms of paying a higher PE.  But if one adjusts for how a prudent person in 1929 should have behaved and how risk was reduced by huge dividends and how a survivor of the darkest days of the crash, when adding back dividends, would have found things weren’t so bad a few years after the bottom of 1933. Such an investor should have not been reluctant to pay up for stocks in the 1942-65 era when PE’s were lower. Conversely they also should not accept the claim that the economy is less risky today to the point where they leap to the conclusion it is acceptable to have very high PE ratios.
If someone in the 1930’s got a 6% dividend compared to today’s 2% that’s 4% extra which could be saved. Over a decade that’s a 48% compounded increase in assets from the increment of dividend that exceeds today’s dividends. That amount could be used as a form of self-insurance against a stock price crash. Sometimes the cost of an out of the money put option is about 4% in modern times. Imagine if a 1930’s investor kept 2 percentage points of the dividend and used the other 4% of a 6% dividend to buy out of the money put options thus greatly reducing his risk and making his risk-adjusted return far better off than today’s investors. The fact that they didn’t pay a higher PE despite the fact that things weren’t that bad show that today’s investors are wrong to pay a high PE. Thus I don’t accept the bullish investors’ theory that today there is less macro risk to investors and which claims that investors should accept an era of high PE’s.
The bailout mechanisms like the bailout of AIG or TARP or the use of FDIC insurance or a 30 year fully amortized non-callable mortgage are not enough to make stocks become low risk assets that justify having a bond-like duration. Many bailout mechanisms are designed to keep the banking and insurance system in operation and are not designed to ensure stock prices stay high. They are not designed to stimulate growth of the economy or jobs. The Federal Reserve is not allowed to buy consumer goods or stocks to stimulate the economy.
Since stocks are not safe enough to justify today’s very high prices then the warnings of crash from those who are concerned about high PE’s are correct. Investors need independent financial advice about the risks of a stock crash even with all the modern stabilizing institutions.