It has been a rough decade for the stock market.
After the peak in 2000, the market has basically been down, up, down, up, mostly sideways for the past 12 or so years.
But it has been nowhere near as bad as the market performance in the Great Depression, right?
The legendary Crash of 1929 and the horrific years that followed… THAT market took 20 years to get back to its 1929 high in inflation-adjusted total returns. And it took 56 years to get back to the 1929 high based purely on inflation-adjusted price!
NOTHING could be worse than that, right?
The chart-master, Doug Short, of dshort.com, has put together a remarkable series of charts comparing our latest secular bear market with the secular bear market that started in the summer of 1929.
The most startling of Doug’s findings?
On an inflation-adjusted TOTAL RETURN basis (including dividends), our current bear market is WORSE than the one that followed 1929.
Specifically, on an inflation adjusted total return basis, our market is down 34% from the peak in 2000. The market in the Great Depression, meanwhile, was only down 16%.
Don’t believe it?
Check out the chart:
Photo: Doug Short
Now, you’re going to want to spend some time going through Doug’s charts on this 1929-2000 comparison in detail, which you can do with the interactive version here. (Or you can read Doug’s excellent summary of his findings here.)
Before you do, though, we need to leave you with another depressing thought.
Despite the HORRIBLE performance of our stock market over the past dozen years, stocks are still at least 20% overvalued. This means they’re likely to continue to have relatively lousy performance going forward.
How do we know stocks are still overvalued? We know by looking at Professor Robert Shiller’s cyclically adjusted PE chart for the past 130 years.
The cyclically adjusted PE is one of the only measures of valuation that has some long-term predictive validity, and this chart suggests that stock returns are going to continue to be crappier than average for a long while to come. The PE is in blue, interest rates in red:
How is it possible that even after a GODAWFUL decade–a decade in which the inflation-adjusted total return of the stock market was WORSE than in the decade after 1929–we can still be set up for lousy returns going forward?
It is possible because, as Robert Shiller’s chart also shows, the valuation peak we reached in 2000 was absolutely unprecedented and dwarfed the one we hit in 1929. And what we’ve seen for the past decade–and likely will continue to see for another decade–is brutal reversion to the mean.
(And it’s also possible because our dividend yield is so low. As Doug’s charts clearly illustrate, dividends contribute a big portion of the total stock market return–and our dividend yield is still a paltry 2%. Back in the bad old days of the Great Depression, the dividend yield was often well over 4%.)
Pass the Prozac, please.