A Very Long Term Look at the Market

Dec. 4.06 | About: SPDR S&P (SPY)

Eddy Elfenbein submits: Through yesterday, the S&P 500 is up 12.2% for the year, and 14.2% including dividends.

Going back to 1925, the stock market is up over 300,000% (I’m using numbers from Ibbotson Associates, plus I’ve added my own to fill in the gaps).

Over the last 80 years and 11 months, the stock market has gained an average of 10.24% a year, that’s including dividends. Inflation has averaged just over 3% a year, and the after-inflation return of equities works out to 7.16% a year. That means that, on average, stocks double their value, in real terms, every ten years.

Here’s a graph of the after-inflation total return of stocks going back to 1925. It’s a logarithmic chart, and I’ve included a 7% trend line for perspective:

real returns stock market

I think it's interesting that the market soared above its trend line in the mid-50s, and stayed there for about twenty years. It then sank below it for the next several years. In fact, hugging the trend line, as we have recently, seems to the unusual pattern. It's also interesting that 1987 now only appears as a little blip.

Here's the chart again, but this time I divided the stock market line by the trend line:

real returns stock market

We're still smack in the middle of the long-term trend.