The stock market in 100-year perspective

Having reached an all-time high a few months ago, the Dow Jones Industrial Average went in free fall and dropped over 1,600 points in the last six trading days, before recovering a couple hundred points this morning — once again confirming the famous forecast of J. P. Morgan about the stock market: “It will fluctuate.” Fluctuate it does, reflecting the ineluctable uncertainty of the future, but on average over time, it rises.  How much does it rise, on long-term average?  Let’s break out of today’s immediate worries, and consider a 100-year perspective.

The DJIA at the end of 1914 was 54.6.  One hundred years later, at the end of 2014, it was 17,823, or 326 times as high.  This century included two world wars, several regional wars, the Great Depression, the Great Recessions of the 1970s and the 2000s, various asset price bubbles, and numerous financial crises.  Here’s the 100-year graph:

 

This is impressive for aggregate increase over time, but what average annual growth rate did it take to go from 54.6 to 17,823 in a century?  The answer, which may seem a moderate number, is a little less than 6% per year (5.96%).

That is a nominal, not a real, rate of increase, because the century also brought the momentous transition to a fiat currency monetary system and endemic inflation.  The increase in the Consumer Price Index over the century averaged about 3.2% a year.  Adjusting for inflation, the real average annual appreciation of the DJIA over the 100 years was 2.7%.  Here is the 100-year history of the DJIA in constant 1914 dollars:

Taking inflation into account definitely makes it look a lot different, but still goes up on average, multiplying about 14 times from 1914 to 2014.

To price appreciation, of course we must add dividends.  Over the century, the average dividend yield of the DJIA was about 4.1%.  Over the century the DJIA provided an average annual real total return of about 6.8%.

A few years ago, in the wake of the great 21^st century bust, there was much talk of the “new normal”—meaning single digit investment returns.  We can see that this was not the new, but the old normal—or more simply, the normal. With plenty of fluctuations along the way, to be sure.

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