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. Past is not 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 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).
Richard Shaw
QVM Group LLC