S&P 500 Price Increase over time

[oldtom01]

Jacob's link to the S&P prices over time got me to wondering, and I'm not sure if I'm phrasing this right, but what accounts for the hockey stick growth of the S&P post ww2? Yes, I googled, but the answers didn't really make a ton of sense to me, maybe someone here can dumb it down for me.

You can see it in the inflation adjusted graph:


And even more starkly in the historical price graph:

[unemployable]

First off, the SPX has only existed as a real-time index since 1955 or so. Before that the performance has been extrapolated, and I'm not sure how well the hypothesized changing of stocks in the index before that date was modeled, or even whether there's a single source of extrapolated returns. Before the mid 50s, about all we had were the various Dow Jones price-weighted indices.

The second chart has an obvious answer: it's simply the curve for exponential growth, which is what you get compounding a given percentage increase over time.

The first chart shows exponential growth too - after all, the long-term real return of the stock market is positive -- but I suspect the red line in the first graph is highly dependent on where you place your break points. Also consider dividends were much higher historically than they are now. If you can find the SPTR (S&P total return index) going back that far I believe it would show a higher percentage return in the earlier decades and make the fit to an exponential function much smoother.

[jacob]

It's surely a confluence of factors, but the things that come up the most in my readings (unfortunately, I don't have access to raw data) is the increasing use of the stock market as a savings vehicle for Americans starting just after WWII. This includes particularly the increase in pension funds for the middle class which used to be nonexistent. (Rich people held essentially all the stock). In the late 70s of so, the 401k was introduced which caused a significant growth in mutual fund ownership. In some ways the popularity of seeing index funds as a high-interest retirement savings account is just the penultimate development of this. IOW, a lot of this has been driven by US tax laws. In countries that do not favor equity over e.g. bonds or housing, stocks don't do nearly as well. See e.g. Italy.

A second factor is the fact that the US essentially "won" WWII and is now the de facto empire/hegemony of the world. Not only was the US not damaged during WWII which allowed for an initial edge in productivity. It also got access to the resources previously commanded by the British empire. Add to that that the intact war industry was available to turn towards civilian production + women had proven that they were just as productive as men when it came to manufacturing => twice the available labor pool => twice the productivity. It is noteworthy that economic productivity have been fading in the US over the past several decades. The trend is down as the low hanging [productivity] fruit has been picked. Part of this problem is that technology efforts in the past two decades have focused on "replacing people in the work place" [with computers] whereas previous tech-waves focused on "adding things" [at home] like electric light and cars and indoor plumbing.

Third factor would be the increase in US oil production after WWII + the US control of the oil production in many other countries. That peaked in 1972 which is why growth stagnated in the 1970s. I think this was resolved by going full-on empire. The US came off the gold standard and essentially started "trading" political directives and military power projection for "stuff" (cheap walmart crap) and resources. Look up petrodollars. Whenever this structure has been challenged, the US has invaded or sanctioned the challenger, so don't do that. As the US paid for this with dollars, other countries had no other use for those dollars than to invest them back into the US markets (they could go elsewhere, but it would be silly to ignore that the US capital markets are the best in the world). This is why the US "enjoys" a a trade deficit and a capital surplus. This sucks for people who work for a living whereas it's absolutely awesome for those who invest for a living. Hence the hockey stick starting at the moment when the US was no longer pressured by OPEC (because Alaska). A similar problem happened in 2008, but then shale was developed; Syria and Ukraine was shut down, and QE was too hard to resist.

Those are the main ones as far as I understand the "situation".

PS: In your second graph, I would rather put the break points for your red lines in 1945 (end of WWII), 1972 (peak of US conventional oil), and 2000 (dotcom peak).

[IlliniDave]

One thing that's missing from the "price" is the change in dividends/dividend policy over time. There was no SP500 back then, but whatever proxy they use was pretty flat from the real Great Depression through about 1950, basically because of the depression and the war. Afterward strong economies and financial engineering by corporations have driven prices upward, through a couple occasional stalls. The "hocky stick" is mainly the successive events of the Great Depression/New Deal and WW II.

[Tyler9000]

Personally, I'm not interpreting the same obvious hockey stick in the first chart so I think it supports the idea that a major factor is inflation. And looking at the turning point on the second chart, my money is on the Bretton Woods agreement in 1944 having something to do with it.

Also, depending on the data source one other possible factor is how the stock market definitions have changed over time. The NYSE didn't really standardize how they classify stocks until the mid 60's when they also massively added to the number of companies being tracked. And believe it or not, Ibbotson reconstructed most of the older data circulated today simply from reading the small handful of company reports printed in archived pages of the NY Times. So it's also possible the series you're looking at is spliced from very different data definitions and the change in slope is simply a methodology problem.

[arcyallen]

One thing that's missing from the "price" is the change in dividends/dividend policy over time.

This brings up a simpler explanation: Dividend payouts have been going down over time. Now instead of payouts you'll see higher share price. If this chart is measuring just share price (not a very helpful measurement ultimately) this could account for a large part of it.

[Lucky C]

Your lines are arbitrary. You can put them different places to show different things but that doesn't mean those things are accurate/real.

Draw the line from the origin to the 2000 peak, or better yet through the mean/trend of 20th century values. Then draw another line through the mean/trend of 2000 through today which would be a lot flatter. Now the question becomes why was the S&P 500 so good in the 20th century but not so good in the 21st century?

The exponential regression in the link below is a straight line with no subdivisions. This is a more valid way to plot the line because overvaluations are over the line and undervaluations are under the line, for the most part.
https://www.advisorperspectives.com/dsh ... erformance

[Lucky C]

P.S. I used to draw these types of arbitrary lines years ago when learning about stock market history and valuations. Even if these lines and questions aren't the "right" lines and questions, they are great starting points to start to think about these things which leads to better analysis, better questions...

[oldtom01]

What follows is some only barely related rambling:

Thanks everyone for your thoughts. My curiosity grew out of Jacob's link from the 10 yr outlook thread plus re-reading some basic FIRE assumptions about the 7% rule. I grabbed the numbers from Jacob's link and saw what TheDollar saw, actual return is 2.7% over the whole chart. Where does the 7% come from?! More reading reveals its *dividends*, but I don't understand how to figure that one out for myself.

And of course as Jacob notes real returns for the last 20 years is 3.7% Which... Well that makes you wonder about a lot of FIRE literature that hangs its hat on 7%. I suspect the truth is that a lot of FIRE people FIRE-ed into of the greatest bull markets of our lifetime and then decided they were experts. This doesn't really invalidate FIRE. But it should make us all cognizant that the model isn't the map and the map isn't the world. But I guess if you're the kind of person who can save 50%+ of your salary for a decade and then walk away then the specifics don't really matter. Barring global economic collapse you'll probably be ok.

I just got a little twisted looking at that chart. Its the kind of thing that makes you think the whole damn enchilada is a bubble, but I guess post-ww2 population growth, inflation, and the world using the US markets as a savings account more or less makes sense.

And all of this is just a subset of me looking at the 60% of my portfolio that is sitting in an S&P 500 indexed fund wondering what to do with it as we approach the end of a business cycle. Something I know a lot of us are thinking about.

[oldtom01]

My index money is in a 401k w/out many options. I'm just happy they have an indexed fund at all.

That's 60% of our wealth at this point, the rest of it is a mix of bonds, cash, and stocks that I like to think of as "diversified" but are probably just a barely aimed shotgun blast of my own biases.