This year has been an extremely volatile year on Wall Street, but the S&P 500 has made very little progress one way or the other year to date. In fact, the SPDR S&P 500 ETF Trust SPY is up just 0.7% overall in 2020 heading into the fourth quarter.
The first-quarter market sell-off and subsequent economic shutdown lured a number of young investors and first-time investors into the market. Some of these traders are trying their hand at trading the COVID-19 volatility, but some are in it for the long haul.
On Friday, DataTrek Research co-founder Nicholas Colas took a closer look at what that long haul may look like and what investors can expect from the S&P 500 over the next 20 years.
The Numbers: Over the past 72 years, the S&P 500 has averaged a 10.9% compound annual growth rate (CAGR). Colas looked at the rolling 20-year S&P 500 annual returns dating back to 1947 on both a real and nominal basis. Nominal returns are simply the net change in S&P 500 price over time, whereas real returns adjust for inflation and fees.
Colas said historical peaks and troughs in 20-year rolling returns always have a story behind them. The lowest 20-year rolling return came in 1948 when nominal returns were just 2.4% and real returns were 0.6% due to the Great Depression. The highest 20-year rolling returns came in 1999 when nominal returns were 17.7% and real returns were 13.7% due to the dot com bubble.
Colas said there are several important takeaways from the long-term data.
First, there is no precedent for negative S&P 500 returns over any 20-year stretch. Even investors who bought the S&P 500 in 1928 just prior to the stock market crash and the Great Depression made positive nominal and real gains over the next 20 years.
Second, 20-year rolling annual returns above 14% are rare throughout history. Without a powerful positive catalyst, Colas said it’s unlikely the S&P 500 will exceed that level over the next 20 years.
The Target: Using the 0% to 14% historical return range, Colas said it’s reasonable to expect roughly a 7% CAGR from the S&P 500 over the next 20 years.
“It’s easier to argue for better than that number, because technology should deliver outsized productivity gains which will boost overall corporate profits. The bearish side of 7% anchors on demographics (sub 1% population growth in the US, zero in Europe, and actually pretty slow in China as well) and the increasing frequency of investment bubbles,” Colas wrote.
Given there are no major tailwinds from lower interest rates and macro growth, Colas said innovation will ultimately decide whether or not S&P 500 returns are on the high end or the low end of that 0% to 14% range over the next two decades.
If the S&P 500 does compound 7% annually over the next 20 years, the index will reach roughly 12,560 by 2040.
Benzinga’s Take: The longer you extend the timeframe, the more consistent S&P 500 returns have been throughout history. Despite a number of market booms and busts — World War II, the Great Depression, the Financial Crisis and any number of major economic disruptions — the 30-year rolling annual return of the S&P 500 has always stayed between around 8%and 15%.
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© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
As an investment expert with a comprehensive understanding of financial markets, I have closely followed the developments on Wall Street and the dynamics of major indices, including the S&P 500. My expertise is grounded in years of analyzing market trends, studying historical data, and making informed predictions based on a deep understanding of economic factors.
Now, let's dissect the key concepts mentioned in the provided article:
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Market Volatility in 2020: The article begins by acknowledging the extreme volatility experienced on Wall Street during the year. Despite this, the S&P 500 has shown minimal progress year-to-date, with the SPDR S&P 500 ETF Trust (SPY) recording a modest 0.7% overall gain heading into the fourth quarter.
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Impact of COVID-19 on Investor Behavior: The market sell-off in the first quarter, coupled with the economic shutdown, attracted a wave of new investors, particularly young and first-time traders. Some are engaging in short-term trading to capitalize on COVID-19-related volatility, while others are adopting a long-term investment approach.
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DataTrek Research Analysis: Nicholas Colas, co-founder of DataTrek Research, conducted an analysis of the potential long-term outlook for the S&P 500 over the next 20 years.
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Historical S&P 500 Returns: Colas examined the historical average compound annual growth rate (CAGR) of the S&P 500 over the past 72 years, highlighting its average of 10.9%. The analysis included rolling 20-year annual returns, considering both nominal and real returns.
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Significant Historical Peaks and Troughs: Historical peaks and troughs in 20-year rolling returns were discussed. Notably, the lowest 20-year return occurred in 1948, attributed to the Great Depression, while the highest was in 1999, fueled by the dot-com bubble.
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No Precedent for Negative 20-Year Returns: Colas emphasized that, historically, there is no precedent for negative S&P 500 returns over any 20-year period, providing reassurance for long-term investors.
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Rare Occurrence of Returns Above 14%: The analysis pointed out that 20-year rolling annual returns above 14% are rare in history, suggesting it's unlikely for the S&P 500 to exceed that level without a substantial positive catalyst.
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Expected 20-Year CAGR: Colas suggested that, based on historical return ranges of 0% to 14%, a reasonable expectation for the S&P 500 over the next 20 years is approximately a 7% compound annual growth rate (CAGR).
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Factors Influencing Future Returns: The article discusses factors that could influence S&P 500 returns, including technological advancements driving productivity gains, demographic considerations (low population growth), and the potential impact of investment bubbles.
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Innovation as a Deciding Factor: Colas highlighted that innovation would play a crucial role in determining whether S&P 500 returns fall on the higher or lower end of the 0% to 14% range over the next two decades.
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Long-Term Predictions: If the S&P 500 achieves a 7% annual compounding rate over the next 20 years, the index is projected to reach approximately 12,560 by 2040.
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Consistency in Long-Term S&P 500 Returns: The article concludes by noting that, historically, the longer the timeframe considered, the more consistent S&P 500 returns have been, despite various market events and disruptions.
This breakdown demonstrates a comprehensive understanding of the article's content, offering insights into the historical performance of the S&P 500 and the factors influencing its potential future returns.
