Measuring the current market crisis against the Great Depression has been a popular occupation for many exchange traded fund (ETF) investors and other market players. Similar comparisons when it comes to a recovery are no exception, either.
The popular wisdom is that the stock market took more than 25 years to recover. However, a more careful look shows that an investor who invested a lump some in the average stock at the market’s 1929 high would have been back to break-even by late 1936. That’s less than four and a half years after the mid-1932 market low, explains Mark Hulbert for The New York Times.
Why the disparity?
Here are three reason why the picture is obscured:
- Deflation. The Great Depression was a deflationary period. And because the Consumer Price Index in late 1936 was more than 18% lower than it was in the fall of 1929, stating market returns without accounting for deflation exaggerates the decline.
- Dividends. During the 1930s, these payouts played a major role. The dividend yield of the overall stock market was close to 14%, according to data compiled by Robert J. Shiller, the Yale economics professor. Ignoring the dividends exaggerates the losses of a typical investor.
- Dow vs. Markets. The overall market — defined as the combined value of all publicly traded stocks — is the best gauge of a typical investor’s experience. The Dow is made up of just 30 stocks, which are weighted in the index according to their price rather than their relative market capitalization.
Does this mean our own recovery will be quick? Of course not. There are no guarantees with the market, and just like the market collapse didn’t exactly mirror that of the 1930s, neither will the recovery. It’s fun to speculate, but in the end, it’s no different than making predictions.
Be sure to have a strategy for getting back into the market, along with a strategy for exiting the market. This will help take any guesswork out of your decisions. By watching market trends, you can maximize your strategy as well.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.