Fascinating chart from Ron Griess of the Chart Store looking at the Dow Jones Industrial Average, via a 20 year rolling return.

The key takeaway is that buying equities when 20 year rolling returns are high is ill advised; making purchases when when 20 year rolling returns are flat to negative seems to generate excellent performance numbers . . .

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20 Year Rolling Returns DJIA

click for larger chart

Category: Cycles, Markets, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “20 Year Rolling Returns DJIA”

  1. Pantmaker says:

    In a word…yes.

  2. Doofus says:

    A picture is worth a thousand words.

    20 years of compressing P/E, volatility, and distress – a secular bear market, and this chart shows we may be about halfway through.

  3. murrayv says:

    The current red arrow has a slope like the last decline, goes down 9.5%age points and gets to 4.5% return by 2020, but doesn’t pass through any of the intermediate peaks. Previous slopes pass through intermediate peaks. If you change the slope to pass through intermediate the line goes parallel with the depression line, drops 13% and gets to 1% return by 2020. The depression dropped 12.4%. Seems like the current slope should be steeper.

  4. jnkowens says:

    2020. Same as what Jeremy Grantham’s 3Q letter suggests. See Chart: Exhibit 1, If the S&P Overcorrects Like the Average of 10 Great (pre-Greenspan) Equity Bubbles…

  5. rd says:

    It is unclear if this is Total Return including re-invested dividends or just price of the DJIA over time.

    I think this is just price without dividends as the DJIA was actually kicking out a lot of dividends in the late Great Depression because of the high dividend yields accompanying the low P/E ratios.

    Unfortunately, our still over-valued market is still kicking out historically low dividend yields.

  6. gman says:

    Dividend and inflation changes this chart substantially. Deflation in the 30s makes the real returns look much better than the chart would indicate.

  7. rd says:

    @gman

    Inflation would also make the late 70s, early 80s look much worse.

  8. [...] 20-year rolling Dow returns exhibit big swings.  (Big Picture) [...]

  9. gman says:

    @rd..exactly!

  10. The Dow is a reflection of the folly of crowds: For the thinking person, the only usefulness of this chart is to demonstrate the way the crowd thinks so it can be avoided.

    “The crowd is untruth.” ~ Soren Kierkegaard

  11. Arequipa01 says:

    @Kent

    A wonderful contribution to these comments (the others are very fine, boyos). Thank you.

    Further reading for those so inclined or if you’re hungry, you can always have a Danish:

    http://www.ccel.org/k/kierkegaard/untruth/untruth.htm

  12. Futuredome says:

    Nah Kent, to the invester class, this is all they care about.

  13. jus7tme says:

    There is nothing magical about the number 20, or the time span “20 years”. The time span could just as easily be chosen as 10 years, 15 years, 16.67years or even ONE DAY (think about).

    And the conclusion would be different.

    The article has a point, but beware of the effect of picking arbitrary numbers like “20″.

  14. wj says:

    Louise Yamada talks about the secular cycle on this podcast: http://www.bloomberg.com/podcasts/on-the-economy/

  15. yellowfin46 says:

    According to this chart, the major market low of December 1974 was not a good time to invest!

  16. rd says:

    @jus7tme

    I think that the 20 and 30 year return charts, especially total returns, are very important.

    People tend to have major segments of their life divvied up into 20-30 year cuts where you transition from one major financial period to another. For example, childhood-education-work intro is typically from age 0 to 20-30 years old. Child-rearing etc goes for another 20-30 years. Peak earning period is typically about 20-30 years, and then work decline and retirement could easily be another 20-30 years. Each of these periods requires a major shift into a different financial plan for the next 20-30 years.

    Possibly the biggest disservice that the financial industry has done over the past couple of decades is trying to shoe horn all of the variability in this chart into a “one-size-fits-all” set of return numbers for pension plans and individuals. With 3% long-term treasury interest rates and the pattern shown in this graph, does anybody seriously believe 8% total return numbers over the decade or two for pension plans? i would not want to be somebody retiring in the past decade relying on their assets as the next decade could be very tough.

    Recency bias drove the dot.com stock bubble and the hosuing bubble. The central bansk are pulling out all of the stops to prevent the 1950 rolling reurn value, so everybody still wants to believe that assets should remain very highly valued. However, the historical cycles indicate we have a ways to go to complete this cycle and sometime in the next decade will be an excellent time to be optimistic about the next 20 years.

  17. RW says:

    It’s useful to remember that PE ratios were still in the neighborhood of 18 in 1972 and it took another big downdraft into 1974 to render them sub-normal. Taking the long view of secular bears is pretty important: IIRC secular bears have never ended until PE’s were below average, typically well below, and with the current S&P 500 PE at 21 (16 is average) there is little reason for long-term confidence whatever the intermediate term may offer. Stay nimble.

    NB Ed Easterling of Crestment Research lays out the problem of retiring at the “wrong” time when dependent on stock returns in his article, Desititute at 80: Retiring in secular cycles. Pretty grim.

  18. I agree this is possibly the biggest disservice that the financial industry has done over the past couple of decades is trying to shoe horn all of the variability in this chart into a “one-size-fits-all” set of return numbers for pension plans and individuals.

  19. lalo says:

    This chart is extremely bullish. In order for the DOW to have a 4% annualized ROR by 2020, it will double from it’s current level. Go long…