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.

No Comments

  • By ObliviousInvestor, April 29, 2009 @ 10:22 am

    You’re right. It’s very important to know that the stock market can go absolutely nowhere for an extended period.

    Also noteworthy: Holding bonds wouldn’t have helped.

    According to the data I use (from Aswath Damodaran at NYU), during the 20-year period ending in 1949 the total real return on 10-Year US Treasury Bonds was lower than that of the S&P 500.

  • By Rick Francis, April 29, 2009 @ 12:00 pm


    I don’t think that the total recovery time is the most relevant question. After all, how many people invested a large lump sum at the market peak?

    A better question:
    What kind of an effect does a large market crash have on periodic investing over a long term?
    If an investor is investing a constant amount per month for 30 years in a broad market index what effect did the 1929 market crash have?
    My guess would be that if the crash happened near the start of their investing period the investor’s compound annual growth rate for the 30 year period would actually be better than the index’s long term average. My reasoning is that they didn’t have a significant investment before the crash and then they bought many more shares at much lower prices. If the crash happened near the end of their investing period their CAGR was below the index’s long term average due to purchasing a lot more shares are larger prices. If the crash happened at the middle of their investment period I suspect they were not far from the index’s long term CAGR.

    -Rick Francis

  • By SJ, April 29, 2009 @ 12:30 pm

    “maintained by ill-paid and anonymous grad students in the employ of Prof. Robert Shiller.”

    Thanks for the love =)

    Good ole grad students…

  • By Frank Curmudgeon, April 29, 2009 @ 2:27 pm

    Rick Francis,

    I don’t think the recovery time is particularly important either. It’s important for investors in stocks to understand what the worst case scenario looks like, but beyond a certain point splitting hairs over exactly how bad it was 75 years ago gets very silly. Clearly, any person who had the courage to invest in the stock market throughout the 1930s (and I think it took a lot of courage) was very happy about it in the decades that followed.

  • By ryan, April 29, 2009 @ 3:08 pm

    I love a good analogy and the “Pacific Ocean contains Hawaii” is perfect.

    Rick brings up a good point that I’ve thought about occasionally when reading those kinds of articles. They often pick one of two scenarios to illustrate what they think is the “worst that could happen.” One is the lump sum invesment on the eve of the crash (yes, bad) and the other is beginning periodic investments just before the crash (not bad at all, in fact, a great opportunity, since you only “lose” one month’s investment). And then they run some sort of happy analysis about how stocks always reward the patient investor. But I’ve never seen a PF article address the really unlucky schmuck who, say, planned to retire in November of 1929.

    So anyway Frank, in one of your earlier posts, you raised the issue with a hypothetical scenario about whether or not stock/bond diversification has any merit. The hypothetical question was that one has a certain amount to invest for a number of years, and once he makes the investment he cannot make any adjustments to the time frame; what mix of stocks and bonds is appropriate; and what difference does it make when he holds what allocation?

    So anyway, this question, believe it or not, was in the back of my head for a couple days, and the best I could come up with is that the GRADUAL AND STEADY reallocation to bonds or safer investments is like dollar-cost-averaging OUT of the market, just like we’re all encouraged to not invest lump sums but spread them out. The idea is to smooth out volatility (for better or worse) on both ends, not just the entry. In all the Depression examples, I suppose this would help the hypothetical unlucky investor. Of course I imagine in alot of boom times, it would potentially hurt him.

    Anyway, to tie in another post, I (at 29 years old) completely understand that the stock market might give me nothing for the next 25 years; and THAT is why I make double mortgage payments each month. It’s just another form of diversification.

  • By Rob Bennett, April 29, 2009 @ 3:31 pm

    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.

    Precisely so.

    My view is that it is impossible to make sense out of any stock investing question without accepting that valuations affect long-term returns and all the implications that follow from that obvious (to me, anyway) reality. Stocks are always a bad long-term bet starting from prices at which a crash has become inevitable and stocks are always a good long-term bet after the crash has taken place.


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