Paraclete Life Planning

This isn't your Parent's Market

If I showed you a chart of the S&P 500 from 1950 until now, it would be understandable if you assumed that the past 15-20 years was the absolute greatest time to invest in the market.
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The chart quite literally looks like it bounced off a spring board and is on a moon shot compared to its historical performance.
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But..
what if I told you that even the greatest bull run in US stock market history wasn't enough to outperform another historical period over the last 75 years?

Compound Annual Growth Rate (CAGR)

CAGR gives respect to growth rates given the compounding nature of a market index. We want to understand the growth rate in percentage form as opposed to the average point gain over the time period. This 'normalizes' the returns and makes them comparable to different metrics or periods, as nominal figures makes it difficult to illustrate comparisons.
To find CAGR, this is the formula-
(End Bal. /Beg. Bal.)^(1/n)-1
where n is the desired rate of time.

From Jan. 1950 to Jan. 1972, the S&P 500 grew from 16.66 to 102.09 points. Using our formula we would have (102.09/16.66)^(1/22)-1 = 8.59%​
1972 is significant in this because in 1971 the U.S. completely separated from the Gold Standard.

From Jan. 1972 to Jan. 1979, the S&P essentially experienced nearly a 'lost decade'; opening at 102.09 and closing at 96.11. Using the formula above, this 7 year span returned -0.86%.
The significance of this time span was MASSIVE in terms of what happened next. We saw an Oil Crisis break out, devaluation of the Dollar in transition to fiat currency, lack of market participation due to economic factors etc.
But in 1979, the 401(k) was first 'created'.
Transitioning from the historical 'Defined Benefit Plan' (Pensions), the onus for retirement now fell on the employee instead of the employer. Now using the 'Defined Contribution Plan', employees were the ones responsible for assuring their retirement preparedness.

From Jan. 1979 to Jan. 2000, the S&P exploded. Opening at 96.11 and closing at 1469.25, using our formula above; the S&P saw a CAGR of 13.86% in that 21 year span.

From Jan. 2000 to near the end of December 2023, the S&P opened at 1469.25 and currently sits at 4739.28. Using our formula, this lands us at a CAGR of 5.00%

The effects of compounding growth in this breakdown cannot be overstated. Nominally, the market currently has been on a tear compared to its history, but the past 24 years is performing 2.5x worse than the preceding 21 years.. why?

The effects of sequential returns at a relative value compared to a nominal value.

For example. Staring at 100 and closing at 120 then the next year closing at 144 then 172.8 then 207.36 then 248.83- you will have averaged a return of 20% per year while only growing 148.83 points.

That, in principle, is what occurred from 1979 to 2000.
A stronger dollar was redeveloped through sweeping interest rate hikes in the early 80s (to curb the surging inflation), massive market inflows occurred with the establishment of 401(k) plans, a near 10% YoY inflation rate reduction (13.3% in 1979 to 3.4% in 2000), and the Dot Com market run up in the 90s..
All compounded to allow a relatively low point index to experience the greatest compounding gains in our last 75 years.
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The market, as it continues to grow, is subject to much larger swings both up and down.
Even to see the hopeful 10% annualized returns, we would need to go from 4739.28 to 5213.21 then 5734.53 then 6307.98 then 6938.78 to finally 7632.66. In 5 years we would need to see a 2893.38 point return, which is 61% of the current market value of the S&P 500.

The CAGR returns over the full 74 years, averages to be 7.94%. This may be where the rule of thumb of 8%-10% annual returns target comes from- but as the index continues to grow, we may have to refocus our return benchmarks if the focus is equity investing.

• two things not addressed here that would have an impact would be dollar cost averaging and the 'real' returns of the market (market returns minus inflation). More information on that if requested.

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