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Because stock market performance is an important factor in U.S. Treasury behavior, I study it closely. I wrote a paper in 2012 that, among other things, examined the consistency (or actually inconsistency) of long-term S&P 500 performance. Between our founder Robert Kessler’s indelible memory of slogging his way through the futile stock market of the 1960s and 1970s and my study of the long-term history of the S&P 500, you will see below that the powerful up-trend of the last 12 years is not a comprehensive representation of the stock market.

There is a bad side too; one whose magnitude and duration may surprise you. The alternating pattern of extended good and bad stock market periods, an all-time high valuation, and questionable-quality asset appreciation say we are near to the end of this good stock market period. There will be a large drawdown and an extended low/negative return period to balance out the above average return of the last 12 years.

About the data and study

The chart and table that follow show the cumulative real total return (dividends reinvested) and various statistics from the S&P 500 back to 1910 split into eight periods: four good (2, 4, 6, and 8) and four bad (1, 3, 5, and 7). The S&P 500 index formally began in 1957 but has been back-analyzed (not by Kessler) to provide comparable information to the early 1900s. The chart is shown on a logarithmic vertical axis to normalize it for exponential growth, i.e., each axis label is double that below it. I chose period demarcations subjectively, but at points to best isolate good periods from bad. I use the real (return after taking out inflation) rather than the nominal return because it better captures the difficulty of the stock market in the 1960s and 1970s. For instance, because annual inflation averaged 7% in period 5 in the first chart below, stocks made a significant positive return on a nominal basis (+5.2% annualized), but was negative (-1.7% annualized) after inflation. The net of inflation figure (real) is more relevant to the experience than the nominal return. Analysis follows the chart and table. Print this pdf of the first two charts to consult as you read the text.

There are several things to point out.