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April 4, 2012, 12:01 a.m. EDT
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By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” It's now official: The 2007-2009 bear market has been completely overcome.
Erased.
Yes, you read that right. The dividend-adjusted version of the Wilshire 5000 index is now higher than it was at the bull market high on Oct. 9, 2007.
To understand what this means, consider an investor who was unlucky enough to invest a lump sum in the stock market on the exact day of that October 2007 high. Provided he or she had the intestinal fortitude to stay with the investment through thick and thin, and reinvest all dividends along the way, the investor would now be in the black.
How long did it take?
This unlucky investor was under water for just four and one-half years. I don't know about you, but that strikes me as remarkably little time to completely recover from what some investors have referred to as one of the worst bear markets of all time.
Some will react to this news by increasing their confidence in the long-term uptrend of the U.S. stock market. After all, if the worst case scenario "” something that was considered so rare that some began referring to it as a "Black Swan" event "” can be overcome in less than five years, shouldn't we be allocating an even higher percentage of our retirement portfolios to equities?
To answer that very crucial question, we need to investigate whether recent experience is more the exception or the rule.
Consider first the recovery time from the 1929 stock market crash and subsequent Great Depression. Because the Dow Jones Industrial Average /quotes/zigman/627449 DJIA -0.49% didn't surpass its 1929 high until 1954, many believe that the recovery time from that horrible era took 25 years.
In fact, though, the Dow paints a distorted picture, since it reflects only 30 stocks, doesn't include dividends, and is not adjusted for the significant deflation that prevailed during much of the 1930s.
A Piper Jaffray analyst predicts Apple shares will reach $1,000 in two years and become the first company ever to have a $1 trillion market capitalization. Photo: Getty Images.
Upon taking all those factors into account, the truth is far less awful. According to Ibbotson Associates, a division of Morningstar, the inflation-adjusted total return index of the U.S. stock market was in late 1936 just as high as it was at its pre-crash peak in 1929. That was just a few months beyond the seven-year mark.
That's a similar order of magnitude to the four-and-one-half-year recovery time from the recent bear market.
What about the infamous 1966-1982 period, over which the Dow went no where in nominal terms and was decimated in inflation-adjusted terms? Again the Dow paints a distorted picture.
According to Ibbotson, the inflation-adjusted total return index of the U.S. market was higher at the end of 1972 than it was in January 1966. And by mid 1983 that index was higher still "” 10 and one-half years later.
In fact, that 10-and-one-half-year recovery time stands as the longest of any over the last century for the stock market as a whole. That's a little more than double the time the market took to recover from the 2007-2009 bear market, but "” once again "” not so much longer as to suggest that recent experience is an exception to the rule.
The bottom line? The stock market's long-term uptrend, and in particular its tendency to quickly recover from bear markets and crashes, are impressive. Though there is no guarantee that the future will be like the past, it provides at least some solace to discover that recent experience is right in line with historical norms.
Click here to learn more about the Hulbert Financial Digest.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse
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