Long Term Trends

The S&P 500 hit its all-time high on January 3rd, 2022. That was 16 months ago, and while the market has rallied significantly off the October 2022 lows, the index still sits about 13% below that January 2022 high. Bear markets are always difficult to endure, but they are a fact of life in investing. Below are a series of charts we’ve shared with some clients that we believe help put the current correction in a historical context.

The following chart shows the S&P 500’s percentage off the all-time high. 0% indicates that the index is at an all-time high. As you can see, the vast majority of the time, the index trades below that level. In fact, historically, the market spends roughly 93% of the time below all-time highs.

We all know that stock index charts tend to go “up and to the right” over time, so it’s very counterintuitive to see so much time spent off the highs, but that is exactly what history tells us to expect.

The next chart shows the S&P 500 index level since 1950. The y-axis is log scale, which normalizes percentage changes over time. For example, a 10% increase from 1955 levels would look the same as a 10% increase from 2015 levels. I also placed a trendline on the graph.

As you can see, there are periods of time throughout history where these stocks have deviated significantly from their long-term trendline- the Dot-Com bubble in 2000 is very prominent, for example. But these periods of over or underperformance have always corrected back to their long-term growth rate.

This effect is also obvious when you look at shorter time periods. The following chart shows the last 10 years of S&P 500 performance (this chart is not log scale).

You can very clearly see a deviation in returns in the 2 years following the COVID correction- the slope of the line completely changed. This was to be expected to a certain extent. The selloff at the beginning of the pandemic was very sharp. Then the federal government and the Federal Reserve took unprecedented steps to inject cash into the economy and lower interest rates- both of which were a boon to the stock market. However, this snap back in stock prices continued far longer than was probably warranted or sustainable. It’s entirely possible that we would have seen a correction back to the longer-term trendline regardless of the broader economic conditions.

Stock market volatility is, in many ways, the price we pay for longer-term returns. People know the stock market has historically returned around 10% per year, but it’s not a smooth 10% by any stretch of the imagination. Furthermore, though the stock market tends to make new highs again and again over time, most trading days do not see new highs. There is risk in stocks, but the risk is what warrants long-term returns.