S&P 500 Price Growth: 1927-Aug 2008

Looking at the S&P 500 (proxies SPY and IVV) from a long-term perspective could be helpful as you form opinions about what may lie ahead.  The past is not a prologue, but it isn’t irrelevant either.  History provides potentially useful reality checks on predictions.

The following linear and semi-log charts plot the long-term price history of the S&P 500 index along with constant growth rates to bracket growth visually.

The linear charts are most common, but over long periods of time where prices change in orders of magnitude, semi-log charts (log value and linear time) give some observers a clearer picture of rates of change.  By using the same percentage linear growth rate curves on the linear chart and semi-log growth rate lines on the semi-log chart, the two formats may be easier to relate visually.

We’ll be commenting on these charts in subsequent posts and making some long-term predictions, but publish the charts here without our opinions about the future for investors who might find them more useful as they are without our opinions as a distracting element.

S&P Yield:

Before we look at the charts, we need to state the obvious fact that dividends are important too, so here are average dividend rates for the index over various time periods within the 1927 to 2008 period:

• 1.62% for the last 10 years
• 1.83% for the last 15 years
• 2.72% since the Oct 1981 when T-Bills were at 14.87%
• 3.16% since the S&P 500 low in Oct 1974
• 3.59% since the end of World War II in Aug 1945
• 3.89% over 82 years since be beginning of 1927

82-Year Index Price Growth (1927-2008):

The next two charts show the price level of the index versus several constant growth rates, ranging from 4% to 6.5%.

(click images to enlarge them)

Linear

Semi-Log

Zoom in to More Recent 34-Year Price Charts (1974-2008):

The next charts are bounded by plots of the constant price growth rates 8%, 8.5%, 9%, 9.75% and 12.5%.

Linear

Semi-Log

Observed Long-Term Index Price Growth Rates:

Except for the years from peak interest rates in 1981 to the top of the dot.com bubble in 2000, which averaged more than 13.5% (and particularly 1994 to 2000 which went nearly vertical), the index price tended to exhibit long-term growth rates generally between 4% and 7%, plus generating dividend yields in the range of more than 1.5% to less than 4%.

The period from the peak interest rates in 1981 to 2008 exhibited price growth just over 9%, because so much of it was in the bubble years.

We looked at the price growth rates over other sub-periods and feel comfortable that 4% to a bit less than 7% is what has occurred more often than not.

We looked at roughly 30 years forward from 1927, and roughly 50 years back from 2008, which are on each side of the time that stock yields went from being more than to less than bond yields.

We looked at the period from the end of World War II to 2008.

We looked at the period from the depths of the 1974 bear market to 2008, as well as the past 15 years and the past 10 years.

All those periods tell us that 4% to 7% price growth plus dividends is what investors received (minus whatever costs they incurred in their approach to investing).

These findings do not mean it would necessarily be reasonable to start from today’s index price and project gains of 4% to 7%, since the current price is in the upper half of the bracketed constant growth ranges.

Forward Projection Using Observed Historical Price Growth Rates:

[Note: A projection is not a prediction, but it could be used as a frame of reference for at least questioning predictions that differ substantially from the projection]

For an example (not as a prediction), if you projected long-term prices from a long-term past date, such as August 1993 (15 years ago and the year before the beginning of the dot.com bubble), the historically observed growth rates would project out five years to 2013 as follows:

• 4% growth => S&P 500 = 1009
• 5% growth => S&P 500 = 1221
• 6% growth => S&P 500 = 1477
• 7% growth => S&P 500 = 1782

Our Short-Term Opinion:

We are actually predicting a decline of the index proxy SPY to at least $105 as a test of support, and if that fails to a possible decline to $80, before completing this bear market (see Sept 17 and Sept 29 articles).

Comments

[Steven Hansen:]

i suspect that the future will be different than the past. too many new variables. i also would like to point out that using 1993 as a launch point for your forward projections is too optimistic based on the cyclic market we are in. using 1990 as the launch point would me more realistic and will give you less optimistic results.

2008 Oct 05 09:18 AM

[QVM Group:]

The Hand:

OK, to be specific, starting from 08/31/90 (to match end end date of the overall data and to create an even 18 year history) would project the current market to be between 653 and 1090 with a 4% to 7% constant growth from 1990; and out five years more to 2013 projects an SP500 index of between 795 and 1529 with a 4% to 7% constant growth rate from 1990.

2008 Oct 05 09:32 AM

[Fighting Yoda:]

More important point to note form an investment perspective is S&P is at a 10 year low. Even if you dollar cost averaged into S&P, last 10 years, you would have lost money. Treasury's would not only have preserved your capital and also would have given at least 3% return (I don't know the exact number is) vs. 1.62% for the S&P.

So equity investment has been a complete scam - Wall Street gets the big bonuses and salaries paid for by us investors. All confidence is lost – systemic risk has been realized – it is worldwide meltdown. The system must be broken up completely.

Meanwhile we are going way down as was clearly evidenced by the post bailout reaction. Bailouts are becoming bigger and bigger but the rallies are becoming smaller and shorter. Finally we had the biggest bailout, the grand daddy of them all, and the market actually went down.

From a technical perspective all support levels have been pierced - 200 d ma, 220 w ma, next support seems to be at 800 the 2002 low.

So just brace yourself, get out stay out.

2008 Oct 05 11:19 AM

[pelican:]

SB-tiger,

The S&P 500 has risen 11 fold since 1980 so I don't agree with you that equity investing has been "a complete scam". I read somewhere that over 80% of all five year periods dating back to the Great Depression has seen the market ahead; over 95% for ten year periods. We are experiencing a second major bear market in just the past eight years, something not too common, so the last ten year period is unusually terrible. I see further downside too, perhaps below 1000 on the S&P, but I plan to go shopping again at some point.

2008 Oct 05 12:29 PM

[genauer:]

Hi folks,
my first post here.
You can get similar data from a website of NY Econ. Prof Adamodar.
Nice excel sheet, compares to TBill and Treas and enables you to calculated the whole thing, including dividend, tax, and inflation for yourselve. It gives you an avg real rate of 4.4 %, and shows a drop of the real value by a factor of 0.67 between 1968 and 1981, instead of going up the expected factor 1.75. You see also a 35 year period wave in it, the next bottom would be 2012-2013. I mean, this is just a rerun of 1973. Everything is in place: a lost war, make it two, yeah, "honorable return home" it will be called, exploding oil prices, a dishonest GOP prez. The value of all that debt can only be devalued with inflation. An unemployment of 9 % (ca 12 % in 70ties definitions) will teach Americans to live with 10 - 15 % less, and things will be allright again, just not in the next 5 brutal years. Other countries had to swallow the same medicine

2008 Oct 05 02:52 PM

[QVM Group:]

Pelican:

You can find additional information about the performance of SP500 over 5 and 10 year periods in a follow-up article to this one at
www.qvmgroup.com/inves...

2008 Oct 06 01:17 AM

[granger:]

great info, enjoyed it, thank you

2008 Oct 11 02:38 AM