Speaking of the Great Depression . . .

Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).

This is his most recent commentary:


S&P 1928-1954

Attached is a chart of the S&P from the peak in 1929 until 1954. There are two things to observe. The first is that yes, if you bought at the end of the crash you progressively made money in stocks. Of course, that end in 1932 was 86% off the highs, but if you waited until then, you did okay. However, if you were one of the unlucky ones who bought at or near the top in late 1929, then you did not make your money back until 1954, a full 25 years later and I’m sure that during that period of time, especially the late 30s and early 40s, people were questioning whether holding stocks was a worthwhile endeavor.

Secondly, had you bought stocks when the market was down about 50% (as noted by the green arrow), about where we are today relatively speaking, then you did not make your money back until the market returned to 16 in summer 1936 (as evidenced by the grey arrow), about 6 years later. Yes it took a few years, but if you were buying stocks over that time frame, adding to positions or establishing new ones, you made money just a few years out even though in the short term, you were probably quite nervous about recouping your investment.

I bring this up again only to provide some historical perspective (refer to my emails last week when we took a look at the 70s) detailing other periods of time when stocks traded laterally for extended periods of time. Now, there are always fluctuating reasons why stocks do this, from weak economic and corporate performance, to relatively high valuation levels. But in any case, there ARE periods where stocks move horizontally for extended periods of time. This doesn’t mean stocks are terrible long term investments or that the buy and hold model is worthless as some commentators are positing. It merely means that after extended periods of economic growth which boosts equity prices, you get extended periods of slower growth (or recession) and, not always simultaneously, low returns from equities. Anyone who suggests otherwise hasn’t taken the time to review history, referring only to the most recent period of time in which stocks moved appreciably higher from 1982-2000. What those short sighted observes fail to mention is that from the middle of the 1960s until the middle of 1982, stocks had little overall appreciation.

I maintain my belief that buying equities at current prices and valuations will turn out to be the right strategy for long term, buy and hold investors. That does not mean stocks cannot go lower, because they most certainly can and will. But we are eight years into this bear market and over 10 years since the S&P was exactly where it is today. But at this point, valuations are attractive for a variety of names and the market as a whole, and further declines at this point do nothing other than to make them even more attractive to those investors with the right strategy and the correct time frame.

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