The 142-Year Track Record of the U.S. Stock Market: 1871-2013, a Bullish Story

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    Oleg Atbashian
    Keymaster

    The 142-Year Track Record of the U.S. Stock Market: 1871-2013, a Bullish Story

    A PowerPoint Presentation

    by Gene Epstein
    Economics Editor, Barron’s
    Gene.epstein@gmail.com
    Bucharest University of Economic Studies
    April 10, 2014

    ———————

    “Death of Equities”
    Business Week cover story 8/13/1979
    “How inflation is destroying the stock market.”

    Average annual inflation-adjusted returns on equities

    • 1974-1979: 9.0%
    • 1969-1979: -1.1%
    • 1959-1979: 2.2%
    • 1949-1979: 6.5%

    Average annual inflation-adjusted returns on equities

    • 1979-1984: 7.3%  (9.0)
    • 1979-1989: 10.8% (-1.1)
    • 1979-1999:  12.4% (2.2)
    • 1979-2009:   7.1%   (6.5)

    “total returns” protocol-1

    • All publicly traded stocks bought on a capitalization-weighted basis
    • All dividends reinvested.

    “total returns” protocol-2

    • No taxes paid (not unrealistic, given advent of tax-deferred accounts)
    • No management fees (not totally unrealistic, given that some exchange traded funds charges as little as 0.07%

    Average annual equity returns for the long run (inflation-adjusted)

    • 1871-2013: 6.66%
    • Means $1000 invested in 1871 would be nearly $9.5 million by 2013 in real dollars.

    Stocks vs. bonds 1871-2013 (average annual infl.-adjusted returns)

    • Stocks: 6.66%
    • Bonds (bellwether gov’t): 2.98%

    Protocol for gov’t bonds

    • Interest and capital gains reinvested each year
    • Bellwether bond (high-grade municipals earlier, Treasury bonds later)

    Why 1871 as starting point?

    • U.S. data become more reliable as of that year.
    • No “survivor bias” (all failed stocks tracked into bankruptcy)
    • Fair range of different industries represented.

    Five-year rolling periods 1871-2013 (138 in all)

    • 27.32%-highest (1923-28)
    • 11.63%—75th percentile
    • 7.17%—median
    • 1.87%–25th percentile
    • -11.94%–lowest (1915-1920)
    • Number of times negative: 25

    10-year rolling periods 1871-2013 (133 in all)

    • 16.84%-highest (1948-58)
    • 10.21%—75th percentile
    • 6.64%—median
    • 3.50%–25th percentile
    • -4.12–lowest (1964-1974)
    • Number of times negative: 14

    20-year rolling periods 1871-2013 (123 in all)

    • 12.63%-highest (1948-68)
    • 8.50%—75th percentile
    • 6.83%—median
    • 4.38%–25th percentile
    • 0.98%–lowest (1900-20)
    • Number of times negative: 0

    30-year rolling periods 1871-2013 (113 in all)

    • 10.60%-highest (1931-61)
    • 7.69%—75th percentile
    • 6.36%—median
    • 5.08%–25th percentile
    • 2.72%–lowest (1902-1932)
    • Number of times negative: 0

    Progression toward the mean
    Total real stock market returns through:
    12/31/2008                  12/31/2013
    5-yr         -3.94%                           17.11%
    10-yr       -2.74%                           6.06%
    20-yr        5.36%                           6.99%
    30-yr        6.72%                           7.93%

    U.S. Treasury bonds 30-year rolling periods 1871-2013 (113 in all)

    • 7.50%-highest (1981-2011)
    • 3.45%—75th percentile
    • 2.27%—median
    • 0.80%–25th percentile
    • -2.05%–lowest (1950-1980)
    • Number of times negative: 24

    Conclusion
    Why do stocks tend to do better over the long run than either bonds or inflation? Mainly because their returns are driven by rising profits — which in turn are driven by real growth in the economy.

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