Historical Performance and Future Stock Market Return Uncertainties

by Ed Easterling

There has never been another period in history more demanding of investor efforts, nor as rewarding of investor diligence, as today’s. 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.

“Long-Term” Returns

The well-known and most-respected long-term average statistic from the stock market is the one provided in the annual compendium published by Morningstar “Ibbotson Stocks, Bonds, Bills, and Inflation Classic Yearbook.” Consultants, financial analysts, advisers and investors seeking a benchmark for long-term stock market returns reach for this annually revised testament of historical financial market data. [Editor’s note: This book can be found at many public libraries.]

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Ed Easterling is the author “Probable Outcomes: Secular Stock Market Insights” (Cypress House Press, 2011). Further, he is president of Crestmont Research and a senior fellow with the Alternative Investment Center at Southern Methodist University’s Cox School of Business.


H from North Carolina posted over 2 years ago:

Great analysis - provides some valuable insights!

Edward from Pennsylvania posted over 2 years ago:

Good article. This agrees with John Hussman's analysis of average annual returns of less than 5% for the next decade. See his weekly comments on the Hussman Funds web site

David from Michigan posted over 2 years ago:

Excellent article. I was surprised that actual economic growth in the last decade was 2%; I assumed it was 3% even with two recessions during the ten year period.

James from Ohio posted over 2 years ago:

I agree with Mr. Easterling’s analysis. Averages can be misleading. For example, let’s say yesterday the temperature was 80°. I was too hot. Today, the temperature is 60°. Now, I’m too cold. 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. Easterling categorized all 10-year returns since 1926 as either less than 8%, 8%-12%, or more than 12%. While this is effective, I feel that it understates the magnitude of the variation in the reader’s mind.

I came to this conclusion by looking at the “moving” AAR for each of 10-year, 20-year, 30-year, and 40-year time periods. I did so using Robert Shiller’s data which can be obtained at www.econ.yale.edu/~shiller/data.htm. This is monthly data for the S&P 500 going back to 1871. It includes dividends. The AARs are “moving” in that for each month in the 140-year period, I calculated the AAR over each of the next 10, 20, 30, and 40 years.

The average AARs for each of the four time periods starting in 1926 are fairly similar. They are 10.5%, 11.2%, 11.2%, and 10.8%, respectively for the 10, 20, 30, and 40 year periods. This is consistent with the roughly 10% AAR that Mr. Easterling quoted and other studies have found for the stock market over the long term.

However, the minimum and maximum AARs vary quite a bit from the 10% average. The minimums were -4.0%, 2.0%, 7.6%, and 7.9%. The maximums were 21.2%, 17.9%, 14.3%, and 13.2%.

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.

This, of course begs the question, “Where are we now?” If one looks at the 10-year, 20-year, 30-year, and 40-years lines in the graph, it appears that peaks in AAR occur roughly every 35 years. As the last bottom occurred about 15 years ago, that suggests that we are somewhere near a peak right now. Hence, an investor would likely be too optimistic to assume an AAR in the future near the long term average of 10%. An AAR from -4% to 8%, depending on his investment horizon, is likely to be more in line.

Jim Grant
Solon, Ohio

Lance from North Carolina posted over 2 years ago:

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.

Dave from Washington posted over 2 years ago:

Great article and follow up post by James!

George Pettiford from Illinois posted about 1 year ago:

The future is unpredictable; there are always BLACK SWAMS ever more present. Just ask the banks or the "quants"

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