Sunday, November 16, 2008

Historical Annual Returns for the S&P 500 Index

As I have discussed previously, the S&P 500 Index is arguably the most widely-followed U.S. stock market index. The S&P 500 Index is a market cap-weighted index of U.S. equities of 500 large companies.

Standard & Poor's introduced its first stock market index in 1923 and created the S&P 500 Index in 1957. Prior to 1957, Standard & Poor's utilized a different index, the S&P 90 Index, that tracked performance of large company stocks. Accordingly, market returns for the S&P 500 Index and it predecessor index are available going back to the 1920s. I have been able to locate a website with such returns dating back to 1926, as shown in the charts below (click on either chart for a larger view).

The YTD total return (including dividends) for the S&P 500 Index is approximately -39.4%. If the S&P 500 Index were to end the year at the same level as it closed on Friday, November 14, 2008, this would constitute the second worst annual return for the S&P 500 Index (or its predecessor index) in the 83 years for which I have data. The only year with a worse performance was 1934, during the midst of the Great Depression, when the index dropped about 43.34%!

The U.S. economy is almost certainly in a recession and it could last several additional quarters, and possibly through the end of 2009. However, the onslaught of another "Great Depression" is hard to imagine, so this might be a good time to consider investing more money back in the market at the current depressed levels.

The charts below list calendar year returns, annualized returns through the end of each calendar year, and annualized returns for 5-, 10-, 15-, 20-, and 25-year periods. As shown, as of today, the annualized return of the S&P 500 Index (and its predecessor index) is about 9.26%, the 5-year annualized return is about -2.92%, the 10-year annualized return is about -1.75%, and 15-year annualized return is about 6.19%, the 20-year annualized return is about 8.22%, and the 25-year annualized return is about 9.61%.

The current 5-year annualized return of -2.92% is the worst it has been since 1941, during World War II, when the annualized 5-year return was about -7.51%. The current 10-year annualized return of about -1.75% is the worst it has ever been based on the data I have back through 1926!

The S&P 500 Index is at extremely low valuations relative to where it has been in recent years. I have a strong feeling that sometime in the future investors are going to look back at the 2008 market and realize that stocks were a screaming "buy." My assessment does not mean that I expect stocks to pop up 40% in a short period of time from where they are now. Instead, it wouldn't surprise me to see the S&P 500 Index drop another 10% from where it is now, as there is quite a bit of fear in the markets at this time and investors have lost confidence in the markets. However, as some point the S&P Index and other U.S. stocks will be much, much higher than they are today, as legendary investor Warren Buffet argued last month.

I have posted an updated chart for the returns of the S&P 500 Index during the period between 1926-2015.

Friday, November 14, 2008

Some Members of Congress Are Considering Eliminating 401(k) Plans

I was reading the most recent issue of Forbes magazine today (dated November 24, 2008) and saw a blurb by one of the columnists who claimed that some members of Congress are considering legislation that would abolish 401k plans. I assumed that was probably mere hyperbole. However, I did some Internet searching and discovered that it is true!

High ranking democrats in the House of Representatives are exploring the possibility of eliminating $80 billion in "tax breaks" on 401(k) plans. Eliminating such tax breaks would mean that money investing in 401(k) plans would no longer be pre-tax. It's a bit of a misnomer to call these "tax" breaks, in my opinion, seeing as how money invested in 401(k) plans is eventually taxed when it is withdrawn from the plan. Accordingly, money invested in 401(k) plans is merely tax-deferred - it's not as though the money is just never taxed at all.

House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, are apparently pushing to remove the tax-deferral status of 401(k) plans and would like to implement a new system of guaranteed retirement accounts to which all workers would be required to contribute.

Teresa Ghilarducci, a professor of economic-policy analysis at the New School for Social Research in New York, has drafted a plan that is being considered by Miller and McDermott, among others. Under Ghilarducci's plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5% of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would a pay 3% a year, adjusted for inflation.

I realize that the stock market returns over the past decade have been pathetic, but locking everyone into a plan that only returns 3 percent a year and forcing everyone to invest 5% of their salaries in it is ridiculous! Since 1926, the U.S. stock market has returned an average of close to 10% per year, or around 7% in real terms when accounting for inflation. Forcing a 25 year-old worker, for example, to pay into such a system for the next 40+ years with such low returns seems like a complete waste of financial resources.

This would be a dramatic expansion of the current Social Security system. It is obvious that the current Social Security system has major problems and may at some point in the near future run out of money. Expanding such a pension-type of welfare system would be one of the stupidest things that the morons running Congress could possibly do. I really hope that this plan doesn't get much support in Congress and it it does, I hope that the new president Obama has the wise judgment to reject such a wasteful and expensive plan.