Even days like Tuesday can't completely scare that gorilla away. The Dow Jones Industrial Average may have been up big, by 889 points in fact, turning in the sixth-biggest daily gain in Dow history. But four of the five days with even bigger percentage gains came between 1929 and 1932.
It's easy to see why investors would want to avoid drawing any lessons from that era: Unlike other bear markets in U.S. history, from which the stock market tended to quickly recover, it apparently took more than two decades for the stock market to recover what it lost between 1929 and 1933.
In fact, it wasn't until Nov. 23, 1954, that the Dow Jones Industrial Average closed above the level at which it closed on Sept. 3, 1929. That's more than 25 years.
If the recovery from the last year's bear market were to take the same length of time, the Dow wouldn't again close above its all-time high from Oct. 9, 2007, of 14,164.53 until - you'd better sit down - Dec. 28, 2032.
That sure is an 800-pound gorilla.
I nevertheless think investors are needlessly scared. A proper read of history shows that it took the stock market far less time to recover than the Dow data suggest.
In fact, according to a chart published in "Stocks For The Long Run," the classic book by Wharton finance professor Jeremy Siegel, the inflation-adjusted total return index of the U.S. stock market was higher by 1936 or 1937 than it was at its pre-crash peak in 1929. That was just three or four years after the end of the 1929-1933 bear market, and less than eight years after the market's 1929 pre-crash peak?
Why the big difference?
The first big factor is dividends. The market's dividend yield was substantial during the 1930s. At the depths of the Great Depression, in fact, that yield was in the double digits Ignoring dividends, which is what investors unwittingly do when focusing on price alone, therefore introduces a significant pessimistic bias into any historical analysis.
Another factor is inflation. Or, to be more accurate, deflation. Believe it or not, the Consumer Price Index dropped by 27% between its 1929 peak and its low in 1933. A stock that dropped by less than this amount in nominal terms over this four-year period therefore actually turned a profit in inflation-adjusted terms.
Yet another reason why it took the Dow so long to surmount its 1929 peak: The decision in 1939 to delete International Business Machines from the average. It wasn't added back until years later. According to Norman Fosback, editor of Fosback's Fund Forecaster, the Dow would today be more than twice its quoted level had IBM not been removed from the Average in 1939.
The bottom line? A bear market of the magnitude of 1929-1933 would be undeniably scary. But it wouldn't be the end of the world either.
Maybe it's just an 80-pound gorilla.