Earlier last week, nearly 3 million unemployed workers applied for benefits last week. This comes as companies continue eliminating jobs in the face of a viral pandemic. This brings the total number of jobless claims to close to 36 million. Some areas of the country are experiencing an unemployment rate of over 30%; similar to that of the Great Depression of the 1930s. So, in essence, we are in the worst economic environment in the last 100 years. The stock market is down but nowhere near one would expect it to be. The $9 trillion in relief from Congress and the Fed as likely contributed to stabilizing the market.
Unfortunately, we have no prior economic data to refer to. It is almost impossible to predict when this recovery will start and how strong it will be. The worst-case scenario is the U.S. experiencing a prolonged economic downturn with unemployment around 20%. In previous posts we were somewhat optimistic. So, if we look at the worst-case scenario, what changes? For my personal investing strategy nothing! Over the course of history “time in the market” has been more successful than “timing the market”. Even if there is a depression, eventually, the market will recover. And if not, well there are very few, if any, reliable alternatives for building wealth.
During the Great Depression it took a decade for GDP to hit 1929 levels. And if you look solely at stock charts, it took nearly 25 years for the market to recover. However, the actual number is only 4.5 years! An investor who bought in at the 1929 peak would have broke even by late 1936. This is less than 4.5 years from the 1932 low. And this represents a worst-case scenario. By averaging down, an investor would have shortened that recovery time. This is largely due to 3 factors; the Dow itself, deflation, and of course, stock dividends. Therefore, in a worse case scenario, we should be looking at around 5 years to recover. During that time, if we average down, we can shorten the recovery depending how much is invested.
During the Great Depression IBM was removed from the Dow Index. So, if we look at the chart, we are stripping out the index’s best performer in the 1940s. In present day this would be like removing Apple. By removing Apple, the Dow would look much worse! Also, during the Depression, deflation was rampant. With the cost of goods in decline, market returns look more favorable. And finally, by 1932 the dividends of the overall stock market were close to 14%. Had one reinvested those dividends it would have led to healthy returns. Yes, the economy looks absolutely terrible right now and it looks to remain that way for AT LEAST the rest of the year. But if we look back to the worst downturn in U.S. history the picture looks a little bit brighter.
I am long on IBM and AAPL. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.