I’ve been digging back through some very old historical data to understand how unusual the 1929 crash was and found the site Measuring Worth, which has the interesting mission “to make available to the public the highest quality and most reliable historical data on important economic aggregates.” Measuring Worth has a data series combining the Dow Jones Industrial Average and its precursor, the Dow Jones Average, all the way back to May 1885. Measuring Worth provides this fascinating history of the index:
On July 3, 1884, Charles Henry Dow began publishing his Dow Jones Average. By the time it was published daily eight months later, the index was composed of 12 stocks, 10 of which were railroads. This index appeared in the Customer’s Afternoon Letter up until July 8, 1889 when the first issue of The Wall Street Journal was published. On October 7, 1896, Dow started publishing two “Daily Moving Averages,” 12 industrials and 20 railroads (that would later become the transportation index.) This first Dow Jones Industrial Average (DJIA) was published through September 29, 1916. This first DJIA closed at 71.42 on July 30, 1914 and so did the New York Stock Market for the next four months. Some historians believe the reason for this was worry that markets would plunge because of panic over the onset of the World War. An interesting book by William L. Silber titled When Washington Shut down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy (2007) has a different explanation. He thinks that Secretary of the Treasury, William McAdoo closed the exchange because he wanted to conserve the US gold stock in order to launch the Federal Reserve System later that year with enough gold to keep the US on the gold standard. Whatever the reason, the first day it reopened on December 12, 1914, the index closed at 74.56, thus the War had not had the predicted impact. On October 4, 1916, the WSJ starts publishing a (new) DJIA of 20 stocks, 8 stocks from the old index and 12 new stocks. It was traced the index back to December 12, 1914 at that time. It is important to know that data for the first DJIA of 12 stocks and the second DJIA of 20 stocks are BOTH available for the 21 months and the first index was about 36% higher than the second and the data here are adjusted to make them a consistent time series. On October 1, 1928 the DJIA of 30 stocks was first quoted in the WSJ. It contained 14 stocks from the second list of 20 and 16 new stocks. Its level was consistent with the second list, so no adjustment was necessary.
In the chart below I’ve plotted the daily closing price for the series from May 1885 to Friday’s close (the blue line, log, right-hand side), along with the drawdowns (the red line, left-hand side).
Source: Samuel H. Williamson, ‘Daily Closing Value of the Dow Jones Average, 1885 to Present,’ MeasuringWorth, 2012.
For me there are two striking features on the chart. First, the 1929 crash is on a different scale to any other crash, dwarfing even the second biggest crash, which was the most recent one beginning in 2007. The 1929 crash began on September 4, 1929, and bottomed on July 8, 1932, down 89.2 percent. The market wouldn’t achieve its 1929 high again until November 23, 1954, more than 25 years from its last peak, and more than 22 years from the bottom. By way of contrast, the second deepest drawdown at -53.8 percent, the 2007 Credit Crisis began October 1, 2007, and ended March 4, 2013, a mere 5 years and 5 months later. The second longest drawdown began November 1905, bottomed down -48.5 percent, and ended almost 10 years later in July 1915.
The second striking feature of the chart is how much time the market spends in a drawdown. The market hits a new high about 3.8 percent of days, which means it’s in drawdown 96.2 percent of the time. In addition to the 1905 and 1929 crashes, there have been two other busts that lasted longer than 8 years, including one that ran from May 1890 and ended almost 9 years later in January 1899, and another that began January 1973, and ended November 2, 1982. And there were six more that lasted longer than four years. It makes me think we really should break out the Dow X,000 hats every time the market crosses a round number that’s a new all-time high.
It’s not all bad news. Since 1885, the Dow Jones is up 552 times, which equates to a compound annual growth rate of about 5 percent (this excludes the impact of dividends, which have been material, to the tune of around 4 percent more on average, and 1.9 percent today). From the 1932 bottom to the next all-time high in November 1954, the market returned more than double that rate at 10.6 percent. Drawdowns are the usual condition of investing, but, over the very long term, the market has continued to grow. To generate the extraordinary returns of the value deciles I’ve examined over the last few weeks, it was necessary to remain fully invested in those value stocks through thick and thin. My firm, Eyquem, offers low cost, fee-only managed accounts that implement a systematic deep value investment strategy. Please contact me by email at email@example.com or call me by telephone on (646) 535 8629 to learn more. Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.