This is a great article by Mark Hulbert from Barrons. Here is a snippet:
MYTH 1: It took 25 years for the stock market to recover its losses from the high reached just before the stock market crashed in October 1929.
It’s easy to see why investors believe this myth to be true: It wasn’t until Nov. 23, 1954, that the Dow Jones Industrial Average closed above the level at which it closed on Sept. 3, 1929, the date of its closing high before that year’s crash. That’s a recovery period of more than 25 years.
If the recovery from the bear market over the last year and a half were to take the same length of time, the Dow wouldn’t again close above its all-time high from Oct. 9, 2007, of 14,164.53 until — you’d better sit down — Dec. 28, 2032.
The truth, however, is that it took stocks far less than 25 years to recover. According to Wharton finance professor Jeremy Siegel, the inflation-adjusted total return index of the U.S. stock market was just as high in late 1936 and early 1937 as it was at its precrash peak in 1929. That was less than eight years later.
That may not be great news to investors who are hoping to recover their bear market losses in just one or two years. But it’s a whole lot better than taking 25 years to recover those losses.
Here is the link: Myths of the 1930s
There’s less to that article than meets the eye, Aaron. Siegel is a buy-and-hold perma-bull who’s talking his own book. Consider again this paragraph:
“The truth, however, is that it took stocks far less than 25 years to recover. According to Wharton finance professor Jeremy Siegel, the inflation-adjusted total return index of the U.S. stock market was just as high in late 1936 and early 1937 as it was at its precrash peak in 1929. That was less than eight years later.”
So stocks were well below their 1929 peak in nominal terms in 1937, but an awful deflationary depression made everything else cheaper then? We have a fiat currency today, and the Fed is going all out to fight deflation. I wouldn’t expect deflation to significantly boost real returns in stocks over the next several years. Also, dividend yields were much higher during the 1930s. Today they are getting cut left and right.
See the John Authers column in Saturday’s FT for a counterpoint. I blogged about that column here.
Also, Siegel uses a “Total Return Index” which includes dividends.
This is a fallacious comparison, because in 1929 the dividend yield was almost 3% at the peak and now we are rocking it with a 2% dividend yield.
Note that over the great depression dividend yields spiked to 10%.
We’ve got along way to go before dividends will save us this time.
Both of you are missing the most important point. Its not that deflation benefited, but dividends as well. Companies back then paid substantial dividends instead of reinvesting it in their business. And investors got their money back sooner than 1954 due to these dividends.
There are many companies out there that if they decided to stop growing or investing could be enormous dividends. Think Google or Microsoft.
But I believe most investors and management believe that they can create more value by reinvesting it in the business.
The point is that just looking at the point total of an index misses out on this point.
“Both of you are missing the most important point. Its not that deflation benefited, but dividends as well.”
We both mentioned dividends, and we both pointed out that they were higher during the 1930s than they are today.
My opinion (and I fully acknowledge it may be wrong) is that companies could pay more in dividends if they chose to. And that the comparing the 1930s attitude towards paying dividends and the current attitude is not necessarily a proper one.
I think that the S&P 500 could pay a much higher dividend then they are paying now.