Morningstar - Q2 2020 - 39

A Flock of Turkeys Market crashes occur repeatedly and vary in depth and duration. The Pain Index is a measure of their
severity relative to the worst one: the Crash of 1929.
Largest Inflation-Adjusted Declines in U.S. Stock Market History, January 1871-March 2020
Decline
Rank

Decline
(%)

Peak

Trough

Recovery

Pain
Rank

Pain Index
(%)

Event(s)

1

79.00

August 1929

May 1932

November 1936

1

100.00

Crash of 1929, 1st Part of Great Depression

2

54.00

August 2000

February 2009

May 2013

3

85.51

Lost Decade: Dot-Com Bubble Burst, Global Financial Crisis

3

51.87

December 1972

September 1974

June 1983

4

80.41

Inflationary Bear Market, Vietnam, Watergate

4

50.96

June 1911

December 1920

December 1924

2

89.34

WWI, Influenza, Postwar Auto Bubble Burst

5

49.93

February 1937

March 1938

February 1945

5

59.57

2nd Part of Great Depression, WWII

6

37.18

May 1946

February 1948

October 1950

6

29.06

Postwar Bear Market

7

35.54

November 1968

June 1970

November 1972

7

14.22

Start of Inflationary Bear Market

8

34.22

January 1906

October 1907

August 1908

8

8.23

Panic of 1907

9

30.41

April 1899

June 1900

March 1901

9

8.18

Cornering of Northern Pacific Stock

10

30.21

August 1987

November 1987

July 1989

10

7.73

Black Monday

11

27.32

October 1892

July 1893

March 1894

16

3.14

Silver Agitation

12

22.80

December 1961

June 1962

April 1963

14

3.55

Cuban Missile Crisis

13

22.04

November 1886

March 1888

May 1889

11

6.25

Depression, Railroad Strikes

14

21.67

April 1903

September 1903

November 1904

12

5.00

Rich Man's Panic

15

21.13

August 1897

March 1898

August 1898

15

3.20

Boer War

16

20.55

September 1909

July 1910

February 1911

17

3.11

Enforcement of the Sherman Anti-Trust Act

17

20.11

May 1890

July 1891

February 1892

13

4.80

Baring Brothers Crisis

Sources: Kaplan et al. (2009); Ibbotson (2020); Morningstar Direct; Goetzmann, Ibbotson, and Peng (2000); Pierce (1982); www.econ.yale.edu/~shiller/data.htm.

but the market eventually rebounded and went
on to new highs.
A decline of 20% or more is often considered
to be a bear market. I use bear markets to proxy
black turkeys. In E X H I B I T 1 , each black turkey
episode begins at the market's peak cumulative
value at that time. The peak cumulative value line
extends horizontally across each episode until the
cumulative value recovers to its previous peak.
This peak-to-recovery gap, the shaded area in the
exhibit, provides a picture of the crash's severity.
The table in E X H I B I T 1 lists the 17 black turkeys
over the 150-year period, suggesting that on
average they occur about once every nine years.

The worst drop was the 79% loss due to
the Crash of 1929 and the first part of the Great
Depression. The second-worst crash was the
54% drop from August 2000 to February
2009. This period covers first the dot-com bubble
burst, then a recovery, but the recovery was
not enough to get the cumulative value back to
the August 2000 peak (from an inflation-adjusted
perspective). Then came the global financial
crisis and the crash of 2007-09. It was not until
May 2013, almost 12½ years later, that
the cumulative value was back at its August
2000 level.
Perhaps the market downturn most relevant to
the situation today is the fourth-largest decline

of almost 51% from June 1911 to December
1920. This period includes the influenza pandemic
of 1918, one of the deadliest pandemics in
human history.
From E X H I B I T 1 , we see that black turkeys have
been occurring throughout the 19th, 20th, and
21st centuries (so far, not including the coronavirus
crash). This is why I labeled the table "A Flock
of Turkeys." 7 Recognizing them in the data
should give us a better understanding of the risks
of equity investing.
Measuring the Pain
In the table, I also include a measure of how
bad each episode of decline and recovery

7 The technical term for a group of turkeys is "rafter."

morningstar.com/lp/magazine

39


http://www.econ.yale.edu/~shiller/data.htm http://www.morningstar.com/lp/magazine

Morningstar - Q2 2020

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