Myth: It Took 25 Years to Recover From 1929 Stock Market Crash

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Sometimes, it pays to scratch a little beneath the surface. In 2012, well-known behavioral scientist Dan Ariely published a paper that found that when people signed an honesty declaration at the beginning of a form, rather than the end, they were less likely to lie. It since has been cited in more than 400 other academic papers. Nine years later, a group of anonymous researchers at Data Colada actually looked at the data and found it clearly fudged using copy-and-paste and a random number generator. (They have to be anonymous to avoid retribution.) Dan Ariely and the other authors have since retracted the paper and disavowed any prior knowledge of the fake data.

You may have heard that it took 25 years for the stock market to recover during the Great Depression. I’ve heard it and simply accepted it as truth, until today. It’s true that the Dow Jones Industrial Average (DJIA or just “Dow”) peaked at 381.17 on September 3rd, 1929. It is also true that the DJIA did not reach that level of 381.17 again until November 23rd, 1954. That is a span of over 25 years.

However, as this 2009 NY Times article by Mark Hulbert explains, that’s not the whole story when you dig a little deeper.

[…] a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 – less than four and a half years after the mid-1932 market low.

The truth is that it took about 7 years for an investor to recover (1929-1936), even if they invested all their money at the very peak. This came 4.5 years after the Dow hit its period low of 41.22 in the middle of 1932. Why?

  • Dividends. Back then, dividend yields were much higher. The absolute dividend payout did not drop nearly as severely as the prices. When the Dow hit a low of 41.22 on July 8, 1932 (that 90% drop you’ve read about), the dividend yield was close to 14%.
  • Deflation. “The Great Depression was a deflationary period. And because the Consumer Price Index in late 1936 was more than 18 percent lower than it was in the fall of 1929, stating market returns without accounting for deflation exaggerates the decline.” Every dollar actually bought significantly more in 1936 than in 1929.
  • Human misjudgment. The DJIA is composed of 30 stocks, which are picked by humans to represent the broad market. According to this article, a total of 18 companies were swapped in and out of the DJIA between 1929 to 1932. That was the highest number of changes to the Dow ever in such a short amount of time. This was a stressful time, and the Dow committee often “sold low” and “bought high” when picking companies to remove and add.

The Great Depression was still an extraordinarily painful time with minimal social safety nets, followed closely by World War II. I recommend reading The Great Depression: A Diary by Benjamin Roth for a vivid picture of what it felt like to live through the Great Depression.

In normal times the average professional man makes just a living and lives up to the limit of his income because he must dress well, etc. In times of depression he not only fails to make a living but has no surplus capital to buy stocks and real estate. I see now how important it is for the professional man to build up a surplus in normal times.

Even today, how many are prepared for the stock market to go down for 2.5 years and then take another 4.5 years to get back to even?

[5/9/1932] Those men who were wise enough to sell during the boom and then keep their funds liquid in the form of government bonds, etc. were not farsighted enough or patient enough to wait almost three years to re-invest. Most of them re-invested a year or more ago and now find stock prices have sagged to 1/3 of what they were when they thought they were buying bargains.

Still, 7 years is very different than 25 years. Imagine being 50 years old and your IRA contribution at 25 years old is still underwater! The worst time period for stock market returns was actually 1972-1982, when it took roughly 10 years to recover if you invested at the peak:

[…] according to a Hulbert Financial Digest study of down markets since 1900, the average recovery time is just over two years, when factors like inflation and dividends are taken into account. The longest was the recovery from the December 1974 low; it took more than eight years for the market to return to its previous peak, which was reached in late 1972.

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

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  1. Another good finding! Thanks!

  2. History is true but time should always be viewed in context of each eras infrastructure and life style. Access to information was slow 90 years ago, There were no sophisticated charting models and tools available to public and most of the investing was done based on brokers recommendation. Today, technology, no fees brokerage apps for retail and better quant models has changed stock market behavior. Now velocity of dip and recovery is faster. Market dips more quickly and recover even quicker. Case in point last year March 2020 dip in market.

    Also one of the big difference you see after 1984 period is replacement of pension with 401k accounts at workplace. 401k program is designed to propel huge sums of money to American stock market. As 401k account has become standard place in last 10 years it is driving massive flow of funds in stock via target date funds which are 70-80% invested in US index funds.
    So to summarize, yes we will see more violent dips in market and crash in years to come but market will bounce back more swiftly then they did in 20th century.

  3. Fascinating study – thanks for sharing. As someone who’s had a lot of fear that we’re approaching another Great Depression-like scenario, this provides quite a bit of relief. But honestly, an even bigger concern than a Great Depression-like scenario for me has been a Japan-like scenario. The Nikkei 225 peaked around 1990 and 31 years later, still hasn’t even approached that same level – and that’s -before- accounting for the loss of purchasing power due to inflation. And unlike the Great Depression period, Japan over this period did not experience significant deflation and did not have high dividend yields. And the 225-component Nikkei presumably suffers less from “stock picking” judgment errors like the Dow 30 did. Now to be fair, Japan had a jaw dropping bubble/run up that preceded that, but considering how much valuations have exploded in the US market, I’m not sure how dissimilar we are anymore. If you come across any information on why our situation is radically different than Japan’s, I’d love to read it. To me, it seems like it’s becoming more similar (a fetish for expansionary monetary policy, aging demographics and slowing birth rate, etc)

  4. Actually, after posting this my previous comment, I realized that Hulbert’s article is actually a bit deceptive. While he may be correctly claiming that new highs were reached in late 1936, just 7 years after the 1929 peak, that 1936 date was also a peak! The DJI fell by almost -50% from 1936 to 1942 and doesn’t return to that previous late-1936 level until around 1945. This (I think) doesn’t change the general premise of the article, in that after accounting for deflation/dividends, the “25 year recovery” situation was less grim, but it’s not nearly as rosy as he makes it out to be. In fact, a quick check seems to show that there was actually net -inflation- from 1936 to 1945 and at quite significant levels (peaking at almost 20% around 1945!) That’s huge. In light of that, I bet that if we moved the goal post slightly and asked how long after the 1929 peak did it take for the DJI to finally produce a slightly higher return than 0%, say 3%/year when taking into account dividends/inflation from 1929. I suspect it may still be as high as 25 years and maybe even more.

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