Something extremely rare just occurred, and it might mean extraordinary stock market returns over the next ten years.
Recent 20-year compounded returns have been below six percent per year for the Standard and Poor’s 500 Index. This low of an annual compounded return has only happened during periods beginning in the late 1920s and early 1930s.
Folks, this is highly unusual.
Looking back at all prior 20-year returns, out of 883 20-year periods (using monthly data) beginning in 1926, only 47 had a 20-year return of six percent or less. It has only happened about five percent of the time. All of them hearken back to (beginning) 1927-1930. That was, of course, a period on the front end of a global depression and a stock market that fell by 85%.
I found that after looking at all of the 47 20-year periods with a return below six percent compounded (per year), the subsequent returns in the next ten years, the minimum annual compounded return was over 16% per year and ranged from a low of 16.43% per year to 21.43% per year.*
Nobody knows what future returns will be. But I have a hard time believing that the 30-year period ending in 2029 will be lower than the lowest 30 year period ever, which had a compounded rate of return of 7.80%. That period began at the very top before the stock market crash of 1929 (September). To get to that return, it would require a compounded return of nearly 12% per year over the next ten years.
History suggests to me that we may be headed for some unbelievable returns over the next ten years. Nobody seems to be able to see it coming. Nobody saw it last time either (in 1982).
It could be that the pundits are correct. But history tells another story of very high returns following all earlier periods with such low returns. Maybe we are headed to another technology boom that we can’t imagine today, again, much like the era just before the 12-fold increase in stock prices in 1982.
I believe we are still in the early innings of a secular (long-term) bull market. That last one took the Dow from 1,000 to nearly 12,000. Nobody imagined such a period. Could the next ten years surprise investors? Can anyone imagine a Dow over 200,000 ten years from now? I can. You heard it here first.
Paul A. Ruedi has been serving people as a financial advisor and retirement planner for over 35 years. In 2014, he founded Ruedi Wealth Management, and currently serves as CEO.
Paul has shared his knowledge on financial issues as the host of Paul Ruedi’s “On the Money” Radio show on Newstalk 1400 WDWS for over 25 years. He has provided his insight for publications such as the Wall Street Journal, US News and World Report, Investor’s Business Daily, and Investopedia.
Read other blogs by Paul:
This material is intended to be for informational and educational purposes only. Ruedi Wealth Management, Inc. does offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.
*S&P 500 Index performance data taken from Dimensional Returns 2.0. An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.