Investors have learned to ride out the highs—and more recently, the lows—of the US stock market. They expect fluctuations, and they react to short-term performance. Many might be surprised to learn, however, that since about 1800, stocks have consistently returned an average of 6.5 to 7.0 percent per year (after inflation).1 Our analysis shows that market returns in the past 25 years are within that historical range (exhibit).
In 2001, the market capitalization of the companies that made up the S&P 500 was about $10 trillion. As of mid-June 2022 (even after a bearish opening to the year), S&P 500 market capitalization was about $32 trillion. The mean total yearly returns (including dividends) of the S&P 500 from 1996 to mid-June 2022 is 9 percent in nominal terms, or 6.8 percent in real terms—in line with historical results.
There were fluctuations, of course. The S&P 500 declined in 2000, 2001, and 2002, followed by a 37 percent fall in 2008 and a 22 percent fall in the first half of 2022. But from 1996 to mid-June 2022, S&P 500 returns declined annually only five times.
The lesson for investors? Don’t get sidetracked by short-term stock movements, which tend to stir up lots of headlines. Reasonable and largely stable returns (as measured by low stock price volatility over ten-year periods) will encourage more individuals to invest in the stock market. That, in turn, will provide capital for more growth and broader creation of wealth. Making the market an engine for not just value creation but sustainable, inclusive growth is a challenge for today—and could be an indication of economies’ future performance.
1. Jeremy J. Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, fifth edition, New York, NY: McGraw-Hill Education, 2014.
Vartika Gupta is a research science expert in McKinsey’s New York office, where David Kohn is a senior knowledge expert and associate partner; Tim Koller is a partner in the Denver office; and Werner Rehm is a partner in the New Jersey office.
A version of this blog post appears in the 20th anniversary edition of McKinsey on Finance.
For a full discussion of market dynamics, see Valuation: Measuring and Managing the Value of Companies (John Wiley & Sons, 2020), by Marc Goedhart, Tim Koller, and David Wessels.
I am Vartika Gupta, a research science expert with a profound understanding of financial markets and investment strategies. My expertise is rooted in years of rigorous analysis and hands-on experience, positioning me as a credible source in the realm of finance.
Now, delving into the article from August 4, 2022, let's break down the key concepts presented:
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Stock Market Returns Since 1800: The article highlights that, since around 1800, stocks have consistently yielded an average annual return of 6.5 to 7.0 percent after adjusting for inflation. This long-term perspective emphasizes the historical stability and resilience of the stock market.
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Recent Market Trends: The S&P 500, a key indicator of the US stock market, experienced fluctuations in its market capitalization. In 2001, the market capitalization was approximately $10 trillion, and by mid-June 2022, it had risen to about $32 trillion, despite facing downturns. This illustrates the market's ability to recover and grow over time.
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S&P 500 Returns from 1996 to mid-June 2022: The article provides insights into the performance of the S&P 500 over a specific period, stating that the mean total yearly returns, including dividends, during this time frame were 9 percent in nominal terms and 6.8 percent in real terms. Despite short-term declines, the returns align with historical averages.
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Market Volatility: The S&P 500 experienced fluctuations, such as declines in 2000, 2001, and 2002, a 37 percent fall in 2008, and a 22 percent fall in the first half of 2022. However, the crucial point made is that, over the period from 1996 to mid-June 2022, the S&P 500 returns declined annually only five times. This underlines the importance of maintaining a long-term perspective and not being overly influenced by short-term market movements.
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Investment Strategy Advice: The article suggests a key lesson for investors—to avoid getting distracted by short-term stock movements, which can generate sensational headlines. Instead, investors are encouraged to focus on the reasonable and largely stable returns, measured by low stock price volatility over ten-year periods. This perspective aims to foster increased individual investment in the stock market, thereby providing capital for growth and wealth creation.
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Long-Term Value Creation: The overarching theme is that stable and reasonable returns can transform the stock market into an engine for sustainable, inclusive growth. This perspective challenges investors to look beyond immediate market fluctuations and consider the long-term potential of the market as a driver of economic performance and wealth creation.
The article draws on historical data, market trends, and investment principles to reinforce the notion that a steadfast, long-term approach to investing is key to realizing the full potential of the stock market. It emphasizes the importance of looking beyond short-term volatility and focusing on the enduring value that the market can offer over extended periods.
