I recall hearing that the average annual return of the market is around 11%, so I went looking and found this…
The current average annual return from 1926, the year of the S&P’s inception, through 2011 is 11.69%. From 1992–2011, the S&P’s average is 9.07%. From 1987–2011, it’s 10.05%.
Right now the S&P index is around 1930, the recent high was 2134. So, how does where we are really compare to where we might expect to be based on past years? I went back the past 12 years to get a weekly close date about this time of year and the projected forward with the numbers referenced above and a “more reasonable” 7%. Below are the results. The second column shows the approximate price in late August for that year. The other columns show where the index would be had it grown steadily at the rate indicated.
Year S&P 500 11.69% 10.05% 9.07% 7%
2014 2000 2234 2201 2181 2140
2013 1635 2040 1980 1945 1872
2012 1410 1965 1879 1830 1727
2011 1219 1897 1788 1725 1598
2010 1080 1877 1743 1667 1515
2009 995 1932 1768 1675 1493
2008 1275 2764 2493 2341 2047
2007 1464 3545 3150 2932 2515
2006 1305 3530 3090 2851 2399
2005 1220 3686 3179 2907 2400
2004 1106 3732 3171 2874 2328
2003 997 3757 3146 2826 2245
As you can see, in most cases the index would actually be higher than it is now. So why does there seem to be so many who are concerned that prices have gone up too much and we’re in another bubble? I’m sure it depends on how one chooses to think of the numbers but I don’t see it. The only cases where the current number is above those above are ones from years where the prices had dropped dramatically due to the financial collapse. Is it reasonable to think that recovery from that period should be above average?
I believe the higher return numbers assume dividends are reinvested. That juices the compounding by a smidgeon over 3% over time.
Actual stock price appreciation (disregarding dividends) for the S&P500 is between 6% and 7% annualized, depending on your time frame. Since most of the stocks here are not paying dividends, the benchmark should be the latter instead of the former.
Tiptree, Fool One guide
Thanks for the clarification.
The problem with any S&P modelling based on recent years is that it includes the Big Dip, a drop which was the third largest ever. Including the Tech Bubble, which you didn’t, only adds to the issue. No, one can argue that these events are evidence that the indices have become more volatile so this is the “new normal”, but that has yet to be demonstrated.
Sage, I understand trying to get a handle on whether the market is expensive or not, but I think there are better ways to figure that out. The long term returns are based on the long term earnings of the businesses. The past earnings do not tell you a lot, there are survivor biases - the companies that do poorly do not survive, the old industrial companies required enormous amounts of capital. I am not convinced that the historical return data is all that relevant to today’s valuation.
But I think two factors are important: balance sheets and cash flow. Cash on the books net of bonds or other long term obligations is very important. We usually talk about non Gaap earnings here, but Gaap earnings are more readily available in historical data, cash flow is readily available, and harder to manulipulate than GAAP earnings.
I don’t typically look at the market as a whole, I spend my time on individual names. I am finding lots of interesting companies with great balance sheets… Way better than I have EVER seen. (Which makes sense, controllers lived through 2008-11 too) If one company has a pe of 18 and leveraged up, it is way different than a company with a pe of 18 and a quarter of its market cap in cash. But both have a pe of 18. Single metrics don’t tell you enough. I don’t care much if the Market is cheap-- I care whether my stocks are. That being said I think the market is cheap based on what I see of PEs net of cash.
I am finding lots of interesting companies with great balance sheets… Flygal