Speaking of the Great Depression . . .
Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).
This is his most recent commentary:
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S&P 1928-1954
Attached is a chart of the S&P from the peak in 1929 until 1954. There are two things to observe. The first is that yes, if you bought at the end of the crash you progressively made money in stocks. Of course, that end in 1932 was 86% off the highs, but if you waited until then, you did okay. However, if you were one of the unlucky ones who bought at or near the top in late 1929, then you did not make your money back until 1954, a full 25 years later and I’m sure that during that period of time, especially the late 30s and early 40s, people were questioning whether holding stocks was a worthwhile endeavor.
Secondly, had you bought stocks when the market was down about 50% (as noted by the green arrow), about where we are today relatively speaking, then you did not make your money back until the market returned to 16 in summer 1936 (as evidenced by the grey arrow), about 6 years later. Yes it took a few years, but if you were buying stocks over that time frame, adding to positions or establishing new ones, you made money just a few years out even though in the short term, you were probably quite nervous about recouping your investment.
I bring this up again only to provide some historical perspective (refer to my emails last week when we took a look at the 70s) detailing other periods of time when stocks traded laterally for extended periods of time. Now, there are always fluctuating reasons why stocks do this, from weak economic and corporate performance, to relatively high valuation levels. But in any case, there ARE periods where stocks move horizontally for extended periods of time. This doesn’t mean stocks are terrible long term investments or that the buy and hold model is worthless as some commentators are positing. It merely means that after extended periods of economic growth which boosts equity prices, you get extended periods of slower growth (or recession) and, not always simultaneously, low returns from equities. Anyone who suggests otherwise hasn’t taken the time to review history, referring only to the most recent period of time in which stocks moved appreciably higher from 1982-2000. What those short sighted observes fail to mention is that from the middle of the 1960s until the middle of 1982, stocks had little overall appreciation.
I maintain my belief that buying equities at current prices and valuations will turn out to be the right strategy for long term, buy and hold investors. That does not mean stocks cannot go lower, because they most certainly can and will. But we are eight years into this bear market and over 10 years since the S&P was exactly where it is today. But at this point, valuations are attractive for a variety of names and the market as a whole, and further declines at this point do nothing other than to make them even more attractive to those investors with the right strategy and the correct time frame.
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November 17th, 2008 at 2:34 pm
Here’s a little different perspective on the stock market and the Great Depression: First, this post provides a chart that maps the different phases of the Great Depression against the backdrop of S&P 500 trailing year dividends per share during the 25 years from January 1925 up through December 1949.
Second, here’s a follow-up post that addresses some of the history of what directly sparked the initial market plunge and why it didn’t let up for years. This post also confirms the beginning and end dates for the Great Depression indicated in the original chart. On a side note, this post featuring a ranking of U.S. presidents provides some background into the period identified as the “dead zone” in the discussion below the ranking table.
Finally, here’s a tool you can use to see what kind of returns a hypothetical investor would have had during the worst part of the Great Depression, based on actual historic, inflation-adjusted data.
November 17th, 2008 at 4:13 pm
Barry, you should also mention that if you bought when the market was down 50%, then *19* years later you still hadn’t made any money(dividends aside). Making no money over 19 years is an eternity and there was a lot of volatility to boot. This is one of the arguments against buying now(down 46% from the top). It’s nice to think that you’ll have a job in a depression and therefore have excess money to continue to invest at very low prices, but this seems like wishful thinking. Also, the market plunged(50% or so) in the second year after the top in 1929. If we are headed into a depression like environment, then we’ll probably know in a years time for sure because the market will be much lower.
I do think that there’s an argument for investing 50% of your money in the S+P 500(not the leveraged ETF’s) and the other 50% in short term treasuries so that you are somewhat covered in either case(depression or simple recession), but then you should avoid rebalancing if the market continues to fall.
November 17th, 2008 at 4:50 pm
If the market will fall further and it will we all think it will why is anyone buying???? If you know it will fall further there is no need to buy and every need to save since there will be better buying ahead.
Only a broker would recomend buying when he knows there will be better buying ahead.
November 17th, 2008 at 5:13 pm
Simon, the answer is simple: Barry employs short term trading strategies in addition to long term strategies. I’m actually doing some of the same stuff myself, but I’m looking for an even bigger near term fall wherein I will do some buying(for the same short term pop of 20% that Barry talks about) because even in a depression there are opportunities to buy although we are playing with nitroglycerine. There’s also the possibility that we are wrong and we are actually near a long term bottom which I don’t want to completely miss out on.
November 17th, 2008 at 8:09 pm
Funny how articles like this, that preach learning from history, always fail to mention the Nikkei 1990-present. Hows about a list of now-defunct stock exchanges? Since we’re reviewing history and all.
November 17th, 2008 at 11:52 pm
Hussman has a different take in his weekly newsletter which was distributed by Mauldin:
The Stock Market is Not in “Uncharted Territory”
http://www.hussmanfunds.com/wmc/wmc081117.htm