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Historical Total Nominal and Real Returns on Stocks (S&P 500 Index)
Stock markets have crashed hard! 2008 was a disaster and 2009 has started out even worse. No one knows if we are at the bottom yet.
Will markets recover? 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.
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. Investors wonder if this time is different and if stocks will turn out to be bad investments even in the long term.
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
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 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, the Dow lost another 19%! But contrary to some reports, the current crash is not unprecedented. This current crash is (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 current crash is (as least so far) 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 current 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.
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 requited 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.
On this after-inflation chart, the '73 / '74 crash is about as large as the current crash. The market declined less in '73 / '74 then it has in 2008 and 2009 (though the end of February) but on an after-inflation basis the '73 / '74 crash was about equal to the current crash.
We have experienced a severe market crash. But it is not unprecedented. Stocks in the past have provided excellent long-term returns in spite of occasional crashes. Those who can stomach the volatility are likely to (eventually) do well in stocks. But as the old saying goes, if you can't take the heat - get of the kitchen.
February 21, 2009 (updated March 1, 2009)
Shawn Allen, CFA, CMA, MBA, P.Eng.
President, InvestorsFriend Inc.