The Great Depression "25-Year Recovery" Myth

If you’re worried about stocks taking a period of many, many years to recover following the recent market plunge, Mark Hulbert offers some insightful — and encouraging — news in The New York Times.

While many have cited the fact that the Dow Jones Industrial Average took 25 years to get back to its pre-Great-Depression highs as reason to worry that the coming market recovery could take a upwards of 10 or even 20 years, Hulbert says the 25-year Depression recovery figure is misleading for a number of reasons. In reality, he says, it took only four-and-a-half years after the Depression bottom for investors to recapture their losses.

How can that be? Three reasons, according to Hulbert:

  • Deflation: By 1936, the Consumer Price Index was 18% lower than it was when the market crashed in 1929. So the amount of purchasing power investors gained in the recovery when the market turned up by, say, a dollar was greater than the amount of purchasing power they lost for each dollar of declines in the preceding bear market.
  • Dividends: When the market bottomed in 1932, the dividend yield of the overall market was almost 14%, according to Yale Professor Robert Shiller’s data. Those payouts aren’t included in the Dow’s price levels.
  • The Dow Is Different Than the Market: While it often gives a good idea of the broader market’s returns, the Dow is made up of a small number of stocks and often doesn’t include certain stocks that are very relevant to average investors. IBM — a very popular and successful stock in the post-Depression era — was dropped from the Dow in 1939, Hulbert notes, so the Dow didn’t benefit from its big 1940s gains, even though many investors did .

“So when did the overall stock market really make it back to its pre-crash peak?” Hulbert asks. “Just four years and five months after its mid-1932 low, according to data provided … by Ibbotson Associates, a division of Morningstar. That seems remarkably fast, given that the stock market lost more than 80 percent of its value from its 1929 high to its mid-1932 low.”

Such a fast recovery is typical for U.S. stocks, however, notes Hulbert. “According to a Hulbert Financial Digest study of down markets since 1900,” he says, “the average recovery time is just over two years, when factors like inflation and dividends are taken into account.” The longest recovery time came after the December 1974 low, when it took more than eight years for the market to return to its previous peak, Hulbert says.

“None of this, of course, guarantees that stocks will have a quick recovery from the market decline that began in October 2007,” Hulbert concludes. “But it suggests that the historical record isn’t as bleak as it looks.”

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