Equity Market Averages: Historical Trends and Performance

The S&P 500 has historically outperformed the Dow Jones Industrial Average over the long term, with an average annual return of 10.2% compared to the Dow's 7.1%.

Looking at the historical data, the S&P 500's average annual return is significantly higher than the Dow's, with a difference of nearly 3 percentage points.

The S&P 500's outperformance can be attributed to its broader market coverage, which includes more companies and sectors, providing a more diversified portfolio.

From 1928 to 2020, the S&P 500's average annual return was 10.2%, while the Dow's average annual return was 7.1%.

The average stock market return is around 6% per year, not 10% as it has been in the past.

Investors should temper their enthusiasm during good times, as the future is likely to be less good than the past.

A 6% average annual return is a reasonable expectation, and it's essential to understand that you'll experience down years as well as up years.

You can use NerdWallet's investment calculator to see what 6% growth looks like based on your planned investment.

The key is to buy and hold, as frequent trading can lead to lower returns due to commissions and taxes.

Rebalancing your portfolio occasionally is a good idea, but try to touch your investments as little as possible.

A few percentage points can make a significant difference in your retirement savings, so it's worth being patient and disciplined in your investment approach.

The S&P 500 index is a market capitalization-weighted index of the 500 leading publicly traded companies in the U.S., overseen by Standard & Poor’s Dow Jones Indices.

The average annualized return from 1928 to November 2024 was a remarkable 10.06%, although adjusting for inflation, the real average annualized return is 6.78%.

The S&P 500's returns have become increasingly influenced by a few major companies, meaning if they have a rough year, it can greatly affect your returns.

Here are some key terms to understand:

Keep in mind that the average return of 10% is not always the average return, and in fact, returns were in that "average" band of 8% to 12% only eight times between 1926 and 2024.

The S&P 500 Index is a market capitalization-weighted index of the 500 leading publicly traded companies in the U.S.

It's overseen by Standard & Poor’s Dow Jones Indices, a division of S&P Global Inc. (SPGI), which has been tracking the market since the 1920s.

The S&P 500 took on its present size and name in 1957, but its roots date back to the 1920s when it was a composite index tracking 90 stocks.

The S&P 500 has a long history of growth, with an average annualized return from 1928 to November 2024 of 10.06%.

This return is impressive, but it's worth noting that the real average annualized return for the same period, adjusted for inflation, is 6.78%.

The History of the S&P 500 tells a story of America's economic ups and downs. The index has faced numerous challenges over the years, but has always managed to recover.

One of the most significant declines was during the Stagflation period (1970-1981), when the index dropped below 360 points. This was due to a combination of inflation and economic stagnation that worried investors.

The S&P 500 has experienced several major declines, each followed by an eventual recovery. The time frames have varied significantly, but the index has always managed to bounce back.

The Internet Boom and Bust (1990-2002) saw the index reach new heights, but the dot-com bubble burst led to a sharp decline. The Financial Crisis (2007-2009) was even worse, with the index dropping nearly 57% from October 2007 to March 2009.

The long recovery that followed (2009-2020) was the longest bull run in history, with the index rising 330% over 10 years. The pandemic and post-pandemic period (2020s) saw a brief interruption to this rise, but the market recovered quickly and has continued to show resilience.

Here's a brief summary of the S&P 500's major declines and recoveries:

The S&P 500 has undergone significant changes over the years, with its sector makeup shifting dramatically.

In 1957, Industrials represented over 40% of the index, making them a dominant force.

The 1970s saw a brief period where Energy companies dominated the index due to the oil crisis.

By the 1990s, Financial services had grown to over 20% of the index, indicating a significant shift in the market.

Today, the Technology sector has reached historic highs, exceeding 25% of market cap, making it a major player in the index.

Here's a breakdown of the major shifts in the S&P 500's sector makeup:

The U.S. stock market has a long history of ups and downs, but one thing remains constant: the average return. According to the S&P 500's history, each major decline has been followed by an eventual recovery, though the time frames have varied significantly.

The S&P 500 has experienced several significant downturns, including the stagflation of 1970-1981, the internet boom and bust of 1990-2002, and the financial crisis of 2007-2009. These periods of decline were followed by recoveries, with the index eventually rising again.

The average stock market return is not always average, and in fact, returns have been in the "average" band of 8% to 12% only eight times between 1926 and 2024. However, the market has gone up just over 70% of years, indicating that returns tend to be positive in a given year.

To put this in perspective, consider the following key terms:

Using an average annual return of 6% is a good rule of thumb for estimating future returns, especially after a period of high returns. This means that you can expect to experience down years as well as up years, and it's essential to rebalance your portfolio occasionally to bring it back to its target composition.

The S&P 500 returns don't always include dividends, but some data providers have calculated how returns change if dividends are reinvested.

The S&P 500 is a stock market index of just over 500 of the largest publicly traded U.S. companies, which makes up about 80% of the entire stock market value.

Some data providers have calculated the impact of reinvested dividends on S&P 500 returns, which can provide a more accurate picture of investment performance.

The S&P 500 is updated quarterly with major changes annually, which helps ensure that the index reflects the current state of the stock market.

Reinvesting dividends can make a significant difference in long-term investment returns, which is why it's essential to consider this factor when evaluating S&P 500 performance.

External factors such as inflation can greatly impact equity market averages. High inflation can erode the purchasing power of investors, leading to a decrease in the value of their investments.

The article notes that a 1% increase in inflation can lead to a 1.5% decrease in stock prices. This is because higher inflation means higher interest rates, which can make borrowing more expensive and reduce demand for stocks.

Central banks, such as the Federal Reserve in the US, can also influence equity market averages through monetary policy decisions. For example, the Fed's decision to raise interest rates can make borrowing more expensive and reduce demand for stocks.

A 10% increase in interest rates can lead to a 5% decrease in stock prices, according to historical data. This is because higher interest rates make borrowing more expensive, reducing demand for stocks and leading to lower prices.

Global events, such as wars or natural disasters, can also impact equity market averages. The article notes that a global conflict can lead to a 10% decrease in stock prices in the first year, followed by a 5% recovery in the second year.