Decades of Negative Returns: A Long-Term Look at the Dow

With the severe market decline this past week, the 10-year percentage change for the Dow Jones Industrial Average (($DJI)) has fallen to single digits, and it appears likely that we could head into negative territory in the weeks to come.

A long-term historical look at the Dow since 1910 finds that ten-year periods of negative returns are not so unusual. They occurred in 1915, during the Great Depression years, and then during the severe recessionary period in 1974. Both the 1930s episode and that beginning in 1974 lasted a number of years: once 10-year performance went negative, it stayed that way for quite a while.

These periods of 10-year underperformance are not common -- they account for only 4469 of the more than 26,000 days in my sample. Interestingly, only the occasions falling during 1937 showed losses over the following ten years: 4314 occasions showed subsequent 10-year rises, 155 showed losses. The median size of the 10-year gain following 10-year weakness was actually a bit smaller (61%) than the median size of 10-year rises for the remainder of the occasions (85%). In short, staying out of stocks following 10-year periods of underperformance did not benefit investors, but on average they did not see unusual outperformance either.

What this little exercise suggests is that periods of long-term market underperformance can persist over time -- they do not necessarily lead to durable rebounds simply because of oversold conditions--but that fleeing markets during these periods of long-term underperformance has not been a winning strategy over the long run. Even after momentum lows were registered in 1932 and 1974, markets engaged in long periods of basing before new secular bull markets kicked in. So far, it is not at all clear that we've seen those momentum lows. I'll need to see those -- and some evidence of meaningful basing -- before aggressively pursuing the next secular bull market of triple-digit 10-year returns.

Comments

[romang:]

That is very true. In the cases before though there was a great deal less pension money in the market. This type of capital most be kept invested. Hence even if it is out of play right now then it would put back into the market in the near future.

2008 Oct 11 02:25 PM

[jmorace:]

Good points.

I remember in Jesse Livermoore's book about the 20s run up and subsequent crash, it ain't over until the big boys puke. We need to see panic selling from Calpers and Goldman and Citadel and Harvard. Not there yet.

Jmorace

2008 Oct 11 04:52 PM

[CLH:]

Ten year markets that dont go up are not uncommon but they dont go down for 10 years so its foolish to leave the market. During the 1970s small stocks did very well. Hiding under the bed never pays. Remember few companies have pensions (401ks instead). If You are waiting for social security you may be eating dog food.

2008 Oct 11 04:57 PM

[AlexS:]

Well if we discount the FDR years (with a Democratic Congress) and we discount the Jimmy Carter years (with a Democratic Congress) and we see coming up the Barack Obama years (with a Democratic Congress) then the market has been a pretty good place for investments. Oh. Obama and a Democratic Congress. Excuse me, I have to go sell some stocks.

2008 Oct 11 05:26 PM

[jcrash:]

I love how people dis the democrats when they have the best record for stock returns.

This selloff has nothing to do with the next president. It has to do with the last 8 or so not taking care of business at home before they goofed off on their partisan war mongering ways.

2008 Oct 11 07:54 PM

[Jolly_Rancher:]

I agree with jcrash. The blame for great crash of 2008 lies squarely on the shoulders of GWB: The money and political capital squandered fighting Iraq; the excessive stimulus checks and tax cuts post 911; the massive run-up in public debt (partly Congress' fault) after given a balanced budget in 2000; the lack of leadership and oversight of banks. Basically GWB went on vacation after the 2000 election. GWB, self-proclaimed as not a man for nuance, may be getting the message now, albeit too late.

2008 Oct 11 08:31 PM

[cosimdm:]

With regard to the budget deficit, the 2007 deficit was at the low end of the range as a percentage of the GDP. All bets are off for this year.

2008 Oct 11 10:16 PM

[Smarty_Pants:]

What happens if you adjust your chart for inflation?

Breaking even over 10 years while inflation debases the currency by 40% isn't a terribly good deal.

Of course this would mainly apply during the time period following FDR's confiscation of the nation's gold and non-convertibility of the currency.

2008 Oct 12 12:02 AM

[irondoor91:]

So long as you need to find someone else to blame (repub or dem or short sellers or hedge funds, etc) you will never get it. You, you, you, are the one in control of your own decisions and destiny. You have to live it out day by day.

Some day far down the path when you are old and broke, you will lament; "If only I'd gone short in 2008".

2008 Oct 12 12:05 AM

[BlueOkie:]

GWB gets lots of blame. Both houses are now controlled by Dem's. Last crisis was oil and their response was to go on vacation. No I'm wrong last time was market crisis - that shut down for Jewish holiday. Nancy and Harry are doing a great job since that took over two years ago.

2008 Oct 12 10:49 AM

[oldgoldbug:]

This is a great situation: guys on Wall St. grease politicians' palms with all kinds of cash so regulators will look the other way, get to make billions upon billions of dollars then get bailed out when the other side of the leverage/marktomarket sword starts slicing them in half. Much like Sgt Schultz "I know nothing".... about CDS, subprime, Alt-A, naked shorting, etc etc etc. And Paulson didn't want to restrict compensation - I wonder where the Wall Street superstars will go now that he grudgingly has agreed. I guess they are not athletic enough to play pro ball nor handsome/beautiful enough to be movie stars - where will they go to earn that kind of cash. I know - become lobbyists or politicians!

2008 Oct 15 01:29 AM