Stock Market Declines – A Historical Perspective

Jason Close, CFA®, CFP®
Jason Close, CFA®, CFP®

When we experience periods of falling stock prices, it’s helpful to consider things from a historical perspective. Seeing the market cycles of the past can take the edge off the uncertainty of the day.

We examined return data for US stocks (using the S&P 500 index) from 1928 through 2015 to identify every significant price decline. We defined significant price declines as losses approaching or exceeding -10% which were separated by meaningful recoveries, though not necessarily recoveries to previous peaks. Below is a decade by decade exploration of returns and interim declines for US stocks.

Observations from our study:
  • Stock market declines of 10% should be expected every year; 20% declines are likely every few years.
  • The annualized return, including dividends, for US stocks from 1926 to 2015 is 10.02%. For the eight decades we calculated annualized returns, they ranged from -0.9% to 19.4%. The data suggests that we should anticipate a wide range of performance results from stocks, even over ten-year periods.
  • Three of the decades with the weakest returns (’30s, ’70s, ’00s) started with expensive stock prices relative to earnings on a historical basis. The starting point matters—when you begin with above-average prices you tend to get below-average returns.

Stocks returns have generally been attractive over long periods. When you have the flexibility and resolve to ride out the inevitable declines, it pays to stay invested. The 1940s are a good example. The annualized total return was 9.2%—to earn that, investors had to endure eight significant declines, three of which exceeded 20%. There is no doubt that investors in the ’40s were anxious along the way—but in the end, it paid to be an equity investor.

Significant US Stock Declines

1930s US Stocks returned 2.3% annualized (1928-1939)

1-1930s

1940s US Stocks returned 9.2% annualized (1940-1949)

2-1940s

1950s US Stocks returned 19.4% annualized (1950-1959)

3-1950s

1960s US Stocks returned 7.8% annualized (1960-1969)

4-1960s

1970s US Stocks returned 5.9% annualized (1970-1979)

5-1970s

1980s US Stocks returned 17.5% annualized (1980-1989)

6-1980s

1990s US Stocks returned 18.2% annualized (1990-1999)

7-1990s

2000s US Stocks returned -0.9% annualized (2000-2009)

8-2000s

2010-2015 US Stocks returned 12.96% annualized (2010-2015)

9-2010

 

*Annualized returns calculated using data from Dimensional Fund Advisors (includes dividends). Stock declines calculated using Bloomberg data, % price change only prior to 1970; decline calculations include dividends after 1970.