Taking Stock of Market Returns

Taking Stock of Market Returns

What do annual returns normally look like in the stock market?

If the S&P 500 were to hold its current levels through year-end, we’ll have just experienced two back-to-back years of greater than 25% gains in the stock market. Calendar year returns like this must be exceedingly rare, right?

Going back to 1928, large-cap stocks in the U.S. have compounded at about 8-10% a year including dividends. This is the “average” year in the stock market that investors often reference when trying to contextualize market returns. Yet the actual experience of realizing an average year of stock market returns is anything but average. In fact, in a given calendar year, there’s rarely ever an average year.

Historical Market Returns

To illustrate this point, let’s look at some historical data. The following is a table that takes a compilation of indices and returns that track the S&P 500 (or an equivalent benchmark) going back to 1928[1].

From 1928 to the end of 2023, there are 96 years of annual total returns for large-cap U.S. companies. Here are some high-level observations on the data:

• The arithmetic[2] average annual return (including dividends) is 11.7%. The actual compounded return (or the geometric average) is 9.8% per year.
• 1993 was the only year since 1928 where the S&P 500 returned between 8-10% (9.97%) over the calendar year, or what we would think of as an “average” year.
• 73% of years exhibited a positive total return.
• 18% of calendar year returns fell between 20-30% and another 19% of years were greater than 30%. In other words, a calendar year return >20% happens about 1/3 of the time.
• The distribution of S&P 500 returns is positively skewed. In a normal distribution, returns would be evenly distributed around the average. However, in the stock market, above-average returns are more frequent and tend to be larger than the negative returns, resulting in a positive (or rightward) skew.
• Here’s the catch:  Above-average years are tempered by market wipe-outs. Since 1928, large-cap stocks returned less than -10% about 13% of the time. Three of those years were returns below -30%.

3-Year Rolling Returns

Here’s another way to look at the concept of lumpy returns with a positive skew. If we review the history of the U.S. stock market in terms of rolling, 3-year compound annual price returns, the last few years have been pretty “average” with a trailing, 3-year annualized return of 8.9% (through the end of November)[3]:

But the path to “normal” over that 3-year stretch was bumpy. The S&P 500 returned -19% in 2022, dug out of that hole with a +24% gain in 2023, and has returned about +26% through the end of November in 2024 (these annual price returns do not include dividends).

Conclusion

Looking at the history of stock market returns tells us nothing about what might happen in the market over the next few days, months, or years. But it is important to study history to keep an open mind about the possibility of good or bad outcomes in any given year.

The study of history is also an important reminder that investing is a long-term endeavor and the path to an average return on a go-forward basis will likely be a very bumpy ride.

 

[1] The S&P 500 index itself was not created until 1957, but various market historians and academics like Robert Shiller and Aswath Damodaran have built time series of market returns on their websites and explain their various methodologies here and here.

[2] The arithmetic average return is simply the sum of annual returns divided by the number of years. It does not account for the effects of compounding. The geometric average, or compounded return, accounts for the compounding effect, making it a more accurate measure of the typical annual growth rate of an investment over time.

[3] Rolling price returns are based on the month-end level of the S&P 500 index (or equivalent large-cap benchmark) and do not include dividends. Historical data provided by Robert Shiller here.

 

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