Looking at the "Real" Dow Jones Average

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Looking at the "Real" Dow Jones Average

Postby Lbill » Thu Oct 22, 2009 9:47 am

Interesting chart from Adam Brochert illustrating the inflation-adjusted DJIA. With the IA-DJIG at the top of it's historical band, it looks like it is pretty over-valued in real currency terms. I have come to believe that nominal stock prices are misleading because currency is a "rubber yardstick."
Image

http://safehaven.com/article-14788.htm
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Postby bob90245 » Thu Oct 22, 2009 10:36 am

Here's another chart showing the real S&P 500 from Robert Shiller's database:

Image
Source: http://bobsfiles.home.att.net/OddsAndEnds.html

And another chart showing the real S&P 500 from Credit Suisse:

http://bobsfiles.home.att.net/OddsAndEn ... _large.png
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Postby Yuba » Thu Oct 22, 2009 10:54 am

So the DOW is over-priced and the SP500 is on trend?

Or maybe we still don't know what's going to happen tomorrow, in one month, or in one year.

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Postby ddb » Thu Oct 22, 2009 11:11 am

Here's my chart from 12/31/1909 through 10/21/2009 (about 100 years) for S&P 500 Total Return in Inflation-Adjusted terms:

Image

Conclusion? Market looks like it could go up from here. Also, the market looks like it could go down from here. Reality may show, however, that the market could stay relatively flat. One thing is certain, though: one of those three things will definitely happen.

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Postby btownguy » Thu Oct 22, 2009 11:36 am

Why does the market have to trend linearly? Who's to say that there isn't some correlation with the life cycle of the country it's based in (or humanity in general)? Who's to say that progress has to progress linearly as well? We may just be the "lucky ones" who live in a time when some things have progressed "just enough". Or we could just fiddle with the index constituents.
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Postby fluffyistaken » Thu Oct 22, 2009 11:36 am

It's amazing how the market changes from a buy to a sell depending on whether those trend lines are drawn a little to the left or a little to the right.
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Postby ddb » Thu Oct 22, 2009 12:54 pm

btownguy wrote:Why does the market have to trend linearly? Who's to say that there isn't some correlation with the life cycle of the country it's based in (or humanity in general)? Who's to say that progress has to progress linearly as well? We may just be the "lucky ones" who live in a time when some things have progressed "just enough". Or we could just fiddle with the index constituents.


It doesn't have to trend linearly - I put it on there just for fun. Whatever trend existed in the economy of the Roman Empire obviously fell off a cliff at some point!

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Re: Looking at the "Real" Dow Jones Average

Postby LH » Thu Oct 22, 2009 1:17 pm

Lbill wrote:Interesting chart from Adam Brochert illustrating the inflation-adjusted DJIA. With the IA-DJIG at the top of it's historical band, it looks like it is pretty over-valued in real currency terms. I have come to believe that nominal stock prices are misleading because currency is a "rubber yardstick."
Image

http://safehaven.com/article-14788.htm


What do people think of the 1929-1932 1966 to 1982 comparison in real terms, first I have seen someone saying that time was as bad as depression was.
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Postby etc06 » Thu Oct 22, 2009 1:37 pm

fluffyistaken wrote:It's amazing how the market changes from a buy to a sell depending on whether those trend lines are drawn a little to the left or a little to the right.

You're right, all of the graphs use differing time ranges.

Lbill's goes from 1800 - 2007
bob's is from 1871 - 2005
ddb's is from 1909 - 2009

ddb's is most current, but with 100 years of points contains the least amount of historical data.
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Re: Looking at the "Real" Dow Jones Average

Postby grabiner » Sun Oct 25, 2009 9:51 pm

LH wrote:What do people think of the 1929-1932 1966 to 1982 comparison in real terms, first I have seen someone saying that time was as bad as depression was.


The chart used the nominal average, ignoring dividends. The Dow lost the same percentage in real value over both periods, but from 1966 to 1982, the overall loss was less because the stocks paid dividends for sixteen years.
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Re: Looking at the "Real" Dow Jones Average

Postby ddb » Mon Oct 26, 2009 9:54 am

grabiner wrote:
LH wrote:What do people think of the 1929-1932 1966 to 1982 comparison in real terms, first I have seen someone saying that time was as bad as depression was.


The chart used the nominal average, ignoring dividends. The Dow lost the same percentage in real value over both periods, but from 1966 to 1982, the overall loss was less because the stocks paid dividends for sixteen years.


I only have calendar-year returns handy at the moment. If one invested in the S&P 500 at the end of 1928, they didn't break even from a real total return standpoint (including dividends) until the end of 1943 (they actually broke even before that, but then lost value again and took until 1943). So that's 15 years of no real return. They actual period was a bit longer, because you hit a higher point during 1929, but as I said I don't have monthly/daily data at my fingertips.

If one invested in the S&P 500 at the end of 1965, they didn't break even from a real total return standpoint until the end of 1982, or 17 years. So, while the Great Depression was worse than the 70s in a lot of aspects, a buy-and-hold investor in the S&P 500 fared similarly during both periods, in that it took somewhere between 15 and 17 years to break even on a lump sum investment.

As of right now, the S&P 500 is at the same real level that it was at sometime in 1997, so here now is a 12-year period of no real returns.

So, in the past 80 years, we have seen three periods where stocks floundered for 12 years or more. I think this type of information should be heavily incorporated into the risk profile questionnaires that every company seems to put out, rather than hypothetical "Are you willing to take more risk if you have higher expected returns?" BS questions.

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The worst real market returns

Postby grabiner » Mon Oct 26, 2009 7:55 pm

ddb wrote:
grabiner wrote:
LH wrote:What do people think of the 1929-1932 1966 to 1982 comparison in real terms, first I have seen someone saying that time was as bad as depression was.


The chart used the nominal average, ignoring dividends. The Dow lost the same percentage in real value over both periods, but from 1966 to 1982, the overall loss was less because the stocks paid dividends for sixteen years.


I only have calendar-year returns handy at the moment.


I believe I have the same source, Robert Shiller's data at http://www.econ.yale.edu/~shiller/data.htm

So, in the past 80 years, we have seen three periods where stocks floundered for 12 years or more. I think this type of information should be heavily incorporated into the risk profile questionnaires that every company seems to put out, rather than hypothetical "Are you willing to take more risk if you have higher expected returns?" BS questions.


This data is the basis for Table 9.1 in the Bogleheads' Guide to Retirement Planning.

Worst 1-year real return: -36.74% in 2008
Worst 5-year real return: -10.03% annualized 1916-1920
Worst 10-year real return: -4.45% annualized 1999-2008
Worst 20-year real return: 0.64% annualized 1962-1981
Worst 30-year real return: 3.11% annualized 1892-1921

The Great Depression doesn't enter into any of these periods (although it is close; 1931 is within rounding error of 2008), and the numbers certainly illustrate the point that the stock market hasn't gotten any less risky, and just how risky it has always been. The long run for investments is at least twenty years, and the barely positive real returns for 1962-1981 would still be a major disappointment for most investors.
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Re: The worst real market returns

Postby ddb » Tue Oct 27, 2009 7:44 am

grabiner wrote:This data is the basis for Table 9.1 in the Bogleheads' Guide to Retirement Planning.

Worst 1-year real return: -36.74% in 2008
Worst 5-year real return: -10.03% annualized 1916-1920
Worst 10-year real return: -4.45% annualized 1999-2008
Worst 20-year real return: 0.64% annualized 1962-1981
Worst 30-year real return: 3.11% annualized 1892-1921

The Great Depression doesn't enter into any of these periods (although it is close; 1931 is within rounding error of 2008), and the numbers certainly illustrate the point that the stock market hasn't gotten any less risky, and just how risky it has always been. The long run for investments is at least twenty years, and the barely positive real returns for 1962-1981 would still be a major disappointment for most investors.


I must admit that I'm surprised the book looked only at calendar-year returns. Surely the worst 1-year return occurred during 1929-1930 and was significantly worse than a 37% loss, no? Probably more like 70% or so.

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Re: The worst real market returns

Postby grabiner » Tue Oct 27, 2009 10:04 pm

ddb wrote:
grabiner wrote:This data is the basis for Table 9.1 in the Bogleheads' Guide to Retirement Planning.

Worst 1-year real return: -36.74% in 2008
Worst 5-year real return: -10.03% annualized 1916-1920
Worst 10-year real return: -4.45% annualized 1999-2008
Worst 20-year real return: 0.64% annualized 1962-1981
Worst 30-year real return: 3.11% annualized 1892-1921

The Great Depression doesn't enter into any of these periods (although it is close; 1931 is within rounding error of 2008), and the numbers certainly illustrate the point that the stock market hasn't gotten any less risky, and just how risky it has always been. The long run for investments is at least twenty years, and the barely positive real returns for 1962-1981 would still be a major disappointment for most investors.


I must admit that I'm surprised the book looked only at calendar-year returns. Surely the worst 1-year return occurred during 1929-1930 and was significantly worse than a 37% loss, no? Probably more like 70% or so.


Note that these are real returns; the market lost more than 37% in 1931, but there was deflation. In contrast, the market lost 37% in 2008, and inflation was near zero.

I had only calendar-year returns available for the whole period, and it made for a more natural comparison. I checked monthly data, which makes the current crash not quite as bad as the Great Depression, but still close. The S&P lost 49% from February 2008-February 2009 with negligible inflation, and 62% from May 1931-May 1932 with 10% deflation reducing the real loss to 58%.

The loss from August 1929-August 1930 was only 30% nominal, and 5% deflation reduces that to 28% real. Other than October 1929, the market went almost nowhere for that year; it was volatile but the ups and downs canceled out.

(edited to correct a date)
Last edited by grabiner on Wed Oct 28, 2009 8:11 pm, edited 1 time in total.
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Re: The worst real market returns

Postby PT Love » Wed Oct 28, 2009 12:19 am

ddb wrote:
grabiner wrote:This data is the basis for Table 9.1 in the Bogleheads' Guide to Retirement Planning.

Worst 1-year real return: -36.74% in 2008
Worst 5-year real return: -10.03% annualized 1916-1920
Worst 10-year real return: -4.45% annualized 1999-2008
Worst 20-year real return: 0.64% annualized 1962-1981
Worst 30-year real return: 3.11% annualized 1892-1921

The Great Depression doesn't enter into any of these periods (although it is close; 1931 is within rounding error of 2008), and the numbers certainly illustrate the point that the stock market hasn't gotten any less risky, and just how risky it has always been. The long run for investments is at least twenty years, and the barely positive real returns for 1962-1981 would still be a major disappointment for most investors.


I must admit that I'm surprised the book looked only at calendar-year returns. Surely the worst 1-year return occurred during 1929-1930 and was significantly worse than a 37% loss, no? Probably more like 70% or so.

- DDB


Using Shiller's data (monthly average prices + dividends), here's what I've got for the worst real returns (all %ages annualized):

Worst 1-year real return: -58.12% 6/1931-6/1932
Worst 5-year real return: -13.23% 9/1929-9/1934
Worst 10-year real return: -5.98% 3/1999-3/2009
Worst 20-year real return: -0.22% 6/1901-6/1921
Worst 30-year real return: 1.89% 6/1902-6/1932

The Great Depression definitely makes its mark here, as the early market volatility produces some really heinous short-term returns if you pick your starting dates just right. The past decade retains its 10-year futility crown, however.

(just for comparison: the 9/1929-9/1930 real loss was "only" -27.76% using these numbers; it took a couple of years for things to really go off the rails.)
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