May has moved back to the rearview mirror and with that, we wanted to provide an update on how current long-term returns for the S&P 500 stack up relative to history.  The chart below compares the trailing one, two, five, ten, and twenty-year annualized total returns of the S&P 500 to the S&P 500’s historical average returns over those same time periods since 1928.

We’re starting to move away from the ‘easy comps’ in terms of market returns relative to the March 2020 lows, but the S&P 500 is still up more than 40% over the last 12 months which is nearly four times the historical average one year return. Over the last two years, the S&P 500’s annualized return of 25.8% still comes in at more than twice the historical average of 10.6%.  On a five and ten-year basis, the S&P 500’s annualized gain also remains comfortably above 10%.  All in all, the last decade has been very good for US equity investors.  The only time period where the S&P 500 has experienced below-average returns is at the 20-year window where the 8.4% annualized gain clocks in at 2.5 percentage less than the historical average of 10.9%.

The chart below compares the S&P 500’s current returns over the last one, two, five, ten, and twenty years to all other periods on a percentile basis.  With mostly above-average returns, it comes as no surprise that most of the percentile readings rank above the 50th percentile, and for most time periods, the percentile rank comes in well above 50%.  The one-year total return of more than 40% actually ranks just above the 93rd percentile, while the two-year return isn’t far from the 90th percentile either.  Moving further out, each of the other readings going out to ten years are all well above the 50th percentile. The only percentile rank below the 50th percentile is the 20-year window and that reading isn’t even close.  On the one hand, the last ten years have been phenomenal for equity investors, but the last 20 years haven’t even been mediocre.

Throughout history, many investors have always worked under the assumption that long-term returns for the equity market are about 10%.  History has shown that to be the case over the last decade at least, as the average annualized one-year gain of the S&P 500 has been well above 10%.  With the S&P 500’s current 20-year annualized gain currently at just 8.4%, though, what will it take for the S&P 500 to reach double-digit gains on an annualized basis over a 20-year window?

For an idea, given the strong performance of the last ten years, a number of commentators suggest that the next ten years for equities will be weak with a reversion to the mean.  Only time will tell, but if we operate under the (unlikely) assumption that the S&P 500 stays at the exact same level it is now going forward for the next ten years, its annualized twenty-year return would top 10% for the first time since August 2008 next September.  After that brief period above 10% from September 2022 through March 2023, it wouldn’t again top that level until February 2029.  In spite of the fact that the annualized 20-year return would top 10% in those two periods, though, it still wouldn’t get as high as the historical average of 10.9% in either of those periods.  This reflects the fact that although the last ten years for US equities have been very strong, they also came shortly after one of the worst ten-year periods for US equities on record.  Click here to view Bespoke’s premium membership options.


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