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The current environment poses a broad range of uncertainties. Investors are now confronted by strong contrasts between conventional wisdom and unconventional insight. For example, conventional wisdom points to historical average returns for long-term investors, but unconventional insights from history tell a different story. This book can be found at many public libraries.

Conventional wisdom believes that any number representing more than 80 years of history must be a valid indication for the next decade or two. Everyone knows that the stock market has ups and downs, yet 80 years is certainly enough time to produce a valid measure for the average condition, right? The three components of stock market returns are dividend yield, earnings growth, and the change in the price-earnings ratio; any other elements will fall within one of these three components.

To reduce the distortions from any single set of data, Figure 1 reflects the average of multiple series for greater consistency. The components vary slightly across the three publications, yet the total return is fairly consistent. Earnings growth contributed between 4. Simplifying the ranges, the average values are 4. Components of Long-Term Average Stock Market Return: Most noteworthy, the series begins in Since the level of the price-earnings ratio is such a major driver of stock market returns, the starting level of the price-earnings ratio for this most recognized series is an under-appreciated footnote.

When assessing the contributions of the components to the long-term average, it is worth noting that a starting price-earnings ratio near 20 results in a dividend yield closer to 2. Valuations and yields are inversely related when the dividend is unchanged. When the price-earnings ratio is near 10, the dividend yield is twice as high as it is when the price-earnings ratio is Further, the long-term average includes a near doubling of the price-earnings ratio.

For this assessment, assume that the price-earnings ratio remains unchanged at currently high levels. Had Ibbotson started the long-term series years earlier or later, when the price-earnings ratio was closer to 20, all of us would carry quite different expectations for long-term returns. When starting from a relatively high price-earnings ratio, two of the stock market return components cannot contribute as much as they did from Some people will identify with the long-term view; others will be curious to see the effect that these factors have on their own investment horizons.

Ten years is generally considered long enough to smooth the yearly ups and downs in the market. There have been rolling year periods sincecovering more than a century of stock market history.

Consider that the expectation for returns from a portfolio includes a blending of assumptions, combining relatively higher stock market returns with much lower bond investment returns and, for some investors, returns from alternative investments. Alternatively, some investors are concentrating their portfolios more heavily in stocks because of the low bond yields.

In Figure 2the columns list the respective year periods. The periods are not random; rather, they run in series that reflect the fluctuating trend in the price-earnings ratio as driven by the inflation rate. With the price-earnings ratio currently near 20, an argument could be made that the next year period ultimately will find its place in the left column.

There are two major drivers of stock market returns.

The first is the growth rate in earnings. The second is the overall level of valuation in the stock market, as measured by the price-earnings ratio.

The price-earnings ratio has two significant effects: The price-earnings ratio drives dividend yield higher valuations make cash dividends reflect lower-yield percentagesand higher price-earnings ratios are vulnerable to decline just as low price-earnings ratios offer the opportunity of multiplied returns from rising valuations.

Although corporate profits ride a wild business cycle, ultimately high and low margins return heartland livestock markets normal. As a result, the long-term growth rate of earnings is similar to that of revenues, since profit margins are determined by dividing profits by revenues. Further, aggregate revenue growth reflects economic growth.

Therefore, earnings growth is driven by economic growth.

One of the major uncertainties for the future is economic growth, and thus earnings growth. It is an uncertainty that weighs heavily on the stock market. The second major uncertainty relates to stock market returns since 1926 second major driver of stock market returns: The most significant driver of market price-earnings ratio over time is the level and trend in the inflation rate.

High inflation brings high interest rates stock market returns since 1926 lower price-earnings ratios.

S&P Total and Inflation-Adjusted Historical Returns

Deflation brings declining earnings in nominal non-inflation adjusted terms and thus lower price-earnings ratios. Conversely, high price-earnings ratios are driven by low and stable inflation, reflecting positive financial conditions and greater certainty.

Stocks with heavy insider buying growth and inflation are also items where the conventional confronts the unconventional. Over the decades of the s, stocks trading below $1 and s, the compounded average annual growth rate was 3.

So during the custom day trading computers of the s —when consumers were loading up their credit cards, homeowners were said to be using home equity like an ATM, unemployment averaged 5.

It reflects the perception that much of the consumption and leverage bookmakers win-cash games the s artificially accelerated economic growth.

They expect that periods during which growth was fueled by debt will be followed by offsetting moderation as the vestiges of leverage and excess consumption are addressed. It reflects a belief that the last 10 years were not different from the previous decades. What shares to buy now asx investors are surprised that mathematics of stock trading decade of the s experienced compounded annual growth of only 1.

Some economists say that it was a decade sandwiched by two recessions, while others blame it on the severe recession of and the related financial crisis. Yet excluding the recession of from the decade, the growth rate for the first eight years of the s was still only 2.

Further, cumulative economic growth throughout the decade of the s did not exceed 2. It would have required an unusual surge—near 4. This sets the stage for a dilemma. All three scenarios are plausible, which makes economic growth a major uncertainty. The answer to the dilemma has very significant implications for stock broker trainee jobs new york market returns over the next decade and longer.

Figure 3 presents a picture of the inflation rate for more than a century. The roller-coaster ride reflects an undulating cycle that does not ride a consistent wave of time. But there are three plausible scenarios. Does your outlook include a trend of deflation the purple line in the graphthe calm of price stability the green lineor a trend of rising inflation the red line?

If the answer is not clear—and it is not for most people—then certainly you now appreciate the second major uncertainty: What will the rate of inflation be in the future? Based upon current levels of valuation, an argument could be made that the stock market is likely to deliver modest or minimal returns.

Nonetheless, investors should not avoid stocks. They should diversify their portfolios and enhance returns from stock market investments. To hedge inflation risk in portfolios, investors can complement diversification with TIPS Treasury Inflation-Protected Securitiesinflation-sensitive commodity investments, make money evenings and weekends defensive stocks that offer higher dividend yields.

To address deflation risk, investors will find that zero-coupon Treasury bonds provide near-guaranteed returns if held to maturity, yet in an environment with significant deflation those bonds can double or triple in value in the near term. If inflation remains under control, investors can sell call options on stock portfolios to enhance returns while still participating in capital gains.

These are among the many ways that investors can realize higher returns when the stock market treads through periods of below-average returns. Using a boating analogy, investors should pull out the oars and actively row their portfolios toward success, while waiting for the next long-term bull market to more passively sail portfolios into the sunset. See his weekly comments on the Hussman Funds web site. I agree with Mr. Averages can be misleading. I was too hot. However, the average of 70 was just right.

In order to portray the variation in the average annual returns AAR that an investor would have obtained, Mr. The average AARs for each of the four time periods starting in are fairly similar.

Easterling quoted and other studies have found for the stock market over the long term. The minimums were The maximums were These results are more vividly portrayed in the following graph.

I could not figure out how to post the graph in this commments section of the AAII web site. If you want a copy, send me an email. The graph portrays a fairly consistent up and down cycle for each of the four time periods.

The conclusion here is fairly obvious. The AAR you can reasonable expect over the long run clearly depends on 1 When you make the investment and 2 How long it is invested. As the last bottom occurred about 15 years ago, that suggests that we are somewhere near a peak right now. Jim Grant Solon, Ohio JWGrant AOL. The "new normal" as PIMCO exec's call it is for lower growth with lower long term returns based upon where we are and the analysis.

We have a mature economy and with maturity in markets for companies comes lower long term growth unless we find new markets to feed growth, unfortunately.

The Historical Rate of Return for the Stock Market Since | Stock Picks System

The future is unpredictable; there are always BLACK SWAMS ever more present. Just ask the banks or the "quants". Do the returns included reinvestment of dividends or just the collection of them?

My impression is that the returns as shown do not include the effects of reinvesting dividends. It is an important distinction, because dividends reinvested during "bad times" low prices have more impact on true total returns i.

So much for John Hussman's powers of prediction. Frequency of Year Returns by Ranges. Get AAII membership FREE for 30 days! Get full access to AAII. PLUS get unbiased investor education with our award-winning AAII Journalour comprehensive ETF Guide and more — FREE for 30 days. History of Inflation and Potential Trends. H from NC posted over 5 years ago: Great analysis - provides some valuable insights!

Edward from PA posted over 5 years ago: See his weekly comments on the Hussman Funds web site David from MI posted over 5 years ago: James from OH posted over 5 years ago: Dave from WA posted over 5 years ago: Great article and follow up post by James! George Pettiford from IL posted over 4 years ago: Just ask the banks or the "quants" David Van Knapp from NY posted about 1 year ago: Paul Grim from NY posted 4 months ago: Sorry, you cannot add comments while on a mobile device or while printing.