The Times Cheers Up Stock Market Investors

Last weekend The New York Times, no doubt in response to criticism that the media reports nothing but grim news about the economy, did its best to cheer us up with an article about how a stock market debacle from 75 years ago wasn’t really all that bad after all.

NYSE floor Old - Crop It started out squarely addressing the problem.

Historical stock charts seem to show that it took more than 25 years for the market to recover from the 1929 crash — a dismal statistic that has been brought to investors’ attention many times in the current downturn.

I’m not that easily cheered up, partly because I understand the nature of the optical illusion that makes those charts “seem to show that it took more than 25 years” to recover from the ‘29 crash.  The charts tend to make the uninformed observer think it took 25 years to recover because it’s actually true.  It was not until 1954 that the Dow got back to its 1929 high.

And I haven’t noticed this fact being brought to investors’ attention all that much lately, although it certainly comes up more than it did pre-2008, which was approximately never.  If I was in charge of the SEC, in order to open a brokerage account all investors would have to sign the following:

I hereby acknowledge that the stock market went sideways for the 25 years from 1929 to 1954 and that despite MSNBC, Blackberries, and Yahoo Finance, everybody involved in the stock market is just as foolish today as back then and just as likely to screw up my plans to retire early.

Of course, the Times article does acknowledge the bare mathematical facts, but argues that there are three ways in which this is misleading.  1) It does not account for the deflation of the early 1930’s.  2) It does not include dividend payments. 3) The Dow Jones Industrials is a stupid index that doesn’t represent the stock market very well.

Those are valid points.  According to the Times, if you correct for these things it only took until 1936 for the market to regain its 1929 level.  Not that I am untrusting, but I ran the numbers myself, using the ever-useful spreadsheet maintained by ill-paid and anonymous grad students in the employ of Prof. Robert Shiller. And sure enough, based on the S&P 500, corrected for deflation, and including reinvested dividends, the September 1929 peak level was regained in November of 1936.

Funny thing, though.  It didn’t last that long.  By April of 1937 it was back under the 1929 level.  Saying that the recovery only took 4 1/2 years because of this short-lived rally is like saying that the Pacific Ocean is not as far across as it seems because of Hawaii. 

After April 1937, the next time it climbed above September 1929 was January 1945.  And even that wasn’t permanent.  It went back and forth for most of  the late 1940’s, crossing above the September 1929 level for the final time in July 1949.

So I guess instead of saying that the market went sideways for 25 years from 1929 to 1954, we should say that it went sideways for 20 years from 1929 to 1949.  I’ll be sure and change what I make investors sign.

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