Market Observations from David Hultstrom

From time to time we re-post David Hultstrom‘s Financial Foundations. Mr. Hultstrom, who is a co-founder of Financial Architects, had the following observations regarding recent stock market highs:

As the U.S. stock market (as measured by the S&P 500) hits all-time highs, I thought some historical perspective on it might be useful.

Over the 98 years of good data that we have from 1926 through December of 2023, an investor who simply owned a proportional amount (by market capitalization) of all publicly traded U.S. companies would have averaged earning just over 10% annually (with all dividends reinvested). In other words, $1,000 invested 98 years ago would have become just over $11.6 million. Of course, this ignores transaction costs (which were much higher historically), inflation (which was slightly under 3% – meaning $1,000 back then is equivalent to just over $17,000 today) and taxes (which at various points have been extraordinarily high – the top rate was as high as 94% and was never less than 50% for 55 years from 1932 until Reagan’s 1986 tax cuts).

In spite of this very good end result, it wasn’t all smooth sailing. Below I have chronicled all the drops of more than 20% we have experienced (this is the usual definition of a bear market). Even with all dividends reinvested, investors in the total U.S. stock market (CRSP 1-10) would have seen their portfolios drop:

• • 83.4% over the 34 months from August, 1929 – June, 1932.
  • 24.1% over the 12 months from May, 1946 – May, 1947.
  • 23.0% over the 6 months from December, 1961 – June, 1962.
  • 33.6% over the 19 months from November, 1968 – June, 1970.
  • 45.1% over the 21 months from December, 1972 – September, 1974.
  • 29.7% over the 3 months from August – November, 1987.
  • 44.9% over the 25 months from August, 2000 – September, 2002.
  • 50.2% over the 16 months from October, 2007 – February, 2009.
  • 20.4% over the 3 months from December, 2019 – March, 2020.
  • 24.7% over the 9 months from December, 2021 – September, 2022.

(NB: I am using monthly returns, so occasionally – as in early 2020 – this misses some of the magnitude of the downturn because it occurred intra-month.)

To summarize, even if we limit ourselves to the period following WWII, about one out of every four years was spent in one of these severe market declines (from a high to a new high). During this time, an investor in the U.S. stock market typically experienced losing about a third of the portfolio’s value at the bottom and potentially about half. At the same time, that investor averaged over 11% annual returns! (While anything can happen, we would expect lower returns in the future for various reasons.)

Note that the returns above assume an investor with almost no diversification. No one with more than a trivial amount invested should have a 100% U.S. stock portfolio, and anyone who lost anywhere close to the 50% in the Great Financial Crisis of 2008 should have either gotten a professional advisor or gotten a new one! (While the broad U.S. stock market was down 50.2%, bonds, as measured by five-year treasuries, were up 15.6% over that same span.)

It may seem perverse, but when markets are doing well, we want to lower expectations. (When they are doing poorly, we will be encouraging!)

---

Mr. Hultstrom holds a graduate degree in business (MBA) as well as numerous financial planning and investment management designations:

• Chartered Financial Analyst (CFA^®)
• Certified Investment Management Analyst (CIMA^®)
• Chartered Alternative Investments Analyst (CAIA^®)
• Certified Financial Planner (CFP^®)
• Certified Private Wealth Advisor (CPWA^®)
• Chartered Financial Consultant (ChFC^®)