Historical Total Nominal and Real Returns on Stocks

Historical Total Nominal and Real Returns on Stocks (S&P 500 Index)

April 28, 2012

Three years ago in the late winter of 2009, stocks were plumbing the depths. 2008 had been a horrible year for stocks and in early 2009 the carnage had continued. But then suddenly, things turned around. To just about everyone’s surprise the market ended up fully recovering by around the end of 2010. And this was no small feat. It took gains of nearly 100% from the low point in march 2009 to do that.

Stocks have out-performed bonds and cash-type investments over the long-term. This has been well-proven including in our own article on long-term Asset Class Performance.

But even if stocks have been historically the best investment in the long-term, investors still have to live through the annual and even the daily and hourly  losses that come with investing in stocks.

The following graphs show the historical annual returns on U.S. large cap stocks as represented by the Dow Jones Industrial Average and the S&P 500 Index

Histor1

The graph above shows that the total return (capital gain plus dividends) on the Dow Jones Industrial Average have been positive in the great majority of years since 1930. Despite some huge loss years, the DJIA has been a big money maker over the years. However, note that negative returns are worse than they look on the chart because, for example a 50% drop, requires a 100% gain to be reversed. Therefore we need a preponderance of the bar areas to be positive.

The loss in 2008 was the largest loss since the depression years of 1930, ’31 and ’32. Furthermore, as of the end of February 2009 the Dow had lost another 19%! But contrary to some reports, that recent crash was not unprecedented. This recent crash was (so far) nominally only a bit worse than the ’73, ’74 crash but when you consider that in the 70’s there was also high inflation which was eroding purchasing power, the recent crash was no worse than the ’73, ’74 crash in terms of loss of purchasing power. Also the ’73. ’74 crash came after about 8 years where the market had not risen overall, whereas the recent crash followed five strong years. And of course, the depression crash was much worse.

The next graph shows similar total return data for the S&P 500 index but starts four years earlier with 1926. Like the Dow chart these are nominal returns before considering the eroding affects of inflation on purchasing power.

 

Histor2

The conclusions from the S&P 500 data are the same as for the Dow Jones Industrial Average data.

Note that both graphs show that periods of significant losses have in the past been followed by strongly positive returns. However, keep in mind that very strong returns are requirted to “make up for” negative returns. A 100% rise is required to reverse a 50% loss.

The next chart shows the S&P 500 data on a real basis where inflation is deducted from each return to provide the percentage gain or loss in purchasing power.

Histor6

On this after-inflation chart, the ’73 / ’74 crash is clearly larger than the recent 2008 crash – at least based on annual data. The market declined a roughly similar amount in ’73 / ’74 as it did in 2008 but on an after-inflation basis the ’73 / ’74 crash was bigger than the recent crash.

It’s not clear what the future will hold.  But as the old saying goes, if you can’t take the heat – get of the kitchen.

April 28, 2012, updating the original article from April 2011

Shawn Allen, CFA, CMA, MBA, P.Eng.

President, InvestorsFriend Inc.

 

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