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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 20, 2010 at 9:45 AM

For the stock market, like the economy, rebounding may take many years

The most fascinating “charticle” I’ve read lately comes from Doug Short at the Business Insider blog. He looks at the time it took the stock market to regain its footing after the crash of 1929 and what that might tell us today. For even though a wealthier America with a stronger safety net and decades of middle-class affluence might not look like the black-and-white despair of the Great Depression, we’ve been through a historic economic collapse. And history shows there’s no fast recovery.

As most history buffs know, the Dow Jones Industrial Average didn’t reach its 1929 levels again until 1954. Short did some deeper analysis with the broader S&P Composite Index. Total return took 20 years to rebound permanently above its pre-Depression levels. The price didn’t recover and stay above that earlier peak until…December 1985.

Here’s the rub: The 1950s recovery was built on a foundation of dividends and dividends reinvested. Yes, dear readers, in the misty past people who bought stocks did so to be owners of companies they believed in, they bought and held, and the value of their investment was largely based on dividends. Since the 1980s, stocks have been bought and sold much more quickly, by institutional investors as well as individuals, with the goal of rising prices. This has driven corporate America’s increasing focus on short-term earnings and mergers to keep the stock price rising.

That’s not the only thing that could complicate a market rebound.

Short reminds us that the stock market was in a long-term bear for the years after the dot-com/Enron collapse, even before the Great Recession. Add this in, and the comparisons with the losses after the 1929 crash are striking. Indeed, “For the past 21 months, the secular bear market that began in 2000 has substantially underperformed the equivalent time frame during the Great Depression.”

“Many people don’t realize that the cyclical bear market that began in 2007 is a continuation of the 2000 bear because in nominal terms the index peak in 2007 was a couple percentage points above the 2000 high,” he writes.

Meanwhile, McKinsey & Co. has a new report looking at analysts. The result: After a decade of tighter regulation in the wake of the Enron/WorldCom/etc. scandals, the analysts are still producing reports that are too optimistic.

No executive would dispute that analysts’ forecasts serve as an important benchmark of the current and future health of companies. To better understand their accuracy, we undertook research nearly a decade ago that produced sobering results. Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.

Alas, a recently completed update of our work only reinforces this view — despite a series of rules and regulations, dating to the last decade, that were intended to improve the quality of the analysts’ long-term earnings forecasts, restore investor confidence in them, and prevent conflicts of interest. For executives, many of whom go to great lengths to satisfy Wall Street’s expectations in their financial reporting and long-term strategic moves, this is a cautionary tale worth remembering.

For average investors, all this adds up to worse than a cautionary tale. Much of the conventional personal finance wisdom is now open to question — it was a product of a long rally that ended in 2000. And as the crust old brokers said, “Don’t confuse brains with a bull market.”

Today’s Econ Haiku:

Housing’s down again

How many times must we hear

The old boom is gone

Comments | More in Retirement, Stock market


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