Dow Stock Index: Recession History

Since history seems to repeat itself, maybe we could learn something about the current possible recession by studying this country’s recession history.

I work with investments,  so I’m particularly concerned with recessions because they can have a very negative impact on investment account values. I’m going to look at the recession history with particular focus on how each recession affected the Dow Industrials Stock Index. I have Dow Index data back to 1930, so we will start there.

dow-jones

I have known for some time that the stock market moves in approximately 15 year cycles. The market goes up for 15 years then seems to go sideways for the next 15 years. This growth and then consolidation pattern happens frequently through out history.

Let’s first consider the Dow Industrials index from 1930 through 1945.

This period started with the great depression. We all know the effect the depression had on stock values. The Dow lost over 88% of its value between 1929 and 1933. It made a nice rebound following the depression. It increased 345% over the next 4 years. We will see there is a theme in the recession / expansion cycle. Recessions are relatively short and can be very violent to investors in the stock market. The expansion period following recessions are much longer and historically quite good.

One thing you need to be extremely aware of. Numbers and percentages can be deceiving. I just mentioned that the index lost 88 percent, but then gained 345%. Sounds like you made up all your losses and then some. Not quite.

The dirty little secret to investment losses is this: if you lose 50% of your portfolio, you need to make 100% just to break even. This is an ugly little fact, but let’s look at it in real life. If you had $100,000 and lost 50%, you would be left with only $50,000. How much do you have to earn on your $50,000 to get back to even? You need to earn another $50,000. This is 100% of what you currently have. You lost 50% and must gain 100% just to break even.

Let’s put this into real life. In 1929 the Dow had a high of around 380 and in 1933 a low of about 48. This is an 88% decrease in value. Over the next 4 years it went from 48 to 187. This is a 345% increase. Sounds like you made up the 88% loss and then some. Unfortunately you have only gained back just over half of what you lost. This also is a recurring theme. When a recession takes huge bites out of portfolio values, it normally takes many years just to break even again. Not to get ahead of myself, but the Nasdaq has only regained about half of what it lost during the last recession. And this is 7 years later! The Dow and S&P 500 took about 6 years to finally break even. The kind of time periods required to recover definitely make the study of the recession history worth while.

Now that some of the back ground work is complete lets look at the next 15 years, from 1945 through 1960. In 1955 the Dow finally got back to where it was before the great depression. This was a very long 25 year wait. Imagine the poor retirees that retired before the depression and never again regained their original portfolio value!

Remember the last 15 years were mostly down then sideways (1930 through 1945). This next 15 year time period (1945 thru 1960) had very mild recessions with the worst only causing a 15% drop in the Dow. Overall, the Dow gained 267% over these 15 years. This is very good reward for a minimum amount of risk. This leads us to the next 15 years, 1960 to 1975.

The 15 year cycle is definitely in effect. The last 15 years were very tame yet had a nice return. These 15 years were not for the feint of heart. Gain was very little over the period, but volatility was killer. The period started out with a wonderful 75% gain, but gave it all back by the end. The recessionary periods were very violent. The reward available in this market was much smaller than the risk. It would have been nearly impossible to be a buy and hold investor and have stayed with the market.

Thus far, we had a 15 year period that was horrible (1930 thru 1945), one that was very nice (1945 thru 1960), then another horrible one (1960 thru 1975). Without looking ahead, we might guess that the next 15 year time period would be another nice one. The market consolidated over the last 15 years and should be ready to move ahead again.

This period began with a 6 years of continued consolidation (going sideways), but when it was done consolidating, it moved up very nicely. It moved from around 800 in ‘82 to 2800 by 1990. This represents a 250% increase for the period. The volatility for the period was pretty tame, at least if you look at the volatility caused by recession. The largest pullback in value was the ‘81 to ‘82 recession which was about 18%. There was a large pullback in August of ‘87 of about 30%, but wasn’t caused by recession and didn’t take that long to be regained; all in all a very fruitful 15 years.

This would lead me to believe that the next 15 years (1990 thru 2005) would be tumultuous again as the market needs to digest its gains.

The roll the market had going continued for the first half of this period. It gained 300% in just 8 years. This was more in the first half than the others gained in their entire 15 year period. This didn’t go un-noticed however, and the market promptly took back a healthy 35% through the next recessionary period. It took until mid way through 2006 to finally get back to even from the highs seen in ‘99. Once this was achieved, however, the Dow just kept going. It extended its gains through the expansion period, hitting new highs once again.

This brings us to today. There is much talk about the beginning of another recession. We’re at the end of a period that should have shown consolidation, but instead had another large run up. This run up wasn’t without sizeable volatility. We’ve just broken a long term support line. I’ve drawn support lines through the years following recessions and had you sold when the support line was broken, you would have been saved a lot of grief during the next recession.

In summary, I would say that the recession history points to our next recession causing havoc on the Dow. When will the next recession be or are we already in it? I’ve covered this dilemma in another article. Personally, I think we are already in it. I believe the Dow Jones just broke support and has a lot of potential to continue downward.

Written ByJohn Norquay www.pivotpoint401k.com