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April 2018 – 92 Years of US Stock Market Returns

The histogram shown below depicts the distribution of calendar year nominal returns for the U.S. stock market (represented by the total annual returns of the S&P 500 index) since 1926. Last year’s return of 21.8 percent was well above the median annual return of 14.0 percent. It marked nine consecutive calendar years of positive returns that have been generated by U.S. stocks since the financial crisis of 2008.

This presentation makes several important points. First, the randomness of returns is evident; there is no discernible “momentum” in annual returns from year-to-year. Second, positive returns are predominant; there have been 68 years with market gains (depicted in green) versus 24 years with losses. Third, the magnitude of the market’s gains in positive years on average exceeds the magnitude of losses during negative years. The average (arithmetic) return during positive years was +21.1 percent versus -13.6 percent during negative years.

The data also reveal that investors should not rely on long-term averages to estimate short-term outcomes. The average annual compound return over the 92-year period was 10.2 percent, yet over these nine decades there were only two years that produced a return between 8 percent and 11 percent!

The histogram does not account for the impact of price inflation. If we adjust this 10.2 percent return to account for a loss of purchasing power (as measured by the CPI), the annualized return falls to 7.1 percent. An investment of $1,000 made at the beginning of 1926 would have grown to $7.35 million by the end of 2017 in nominal dollars but, after accounting for price inflation, the ending value would have been only about $532,000.

Despite the impossible-to-predict calendar year returns, U.S. stock markets will likely continue to be the best alternative for investors seeking long-term real growth.


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Also In This Issue:
Quarterly Review of Capital Markets
The High Yield Dow Investment Strategy
Recent Market Statistics
Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles