In 2007 and 2008, I posted charts of the annual stock market and bond market returns for various indices for the time periods from 1980-2006 and 1980-2007, respectively. The charts I previously posted included returns for small cap indices (Russell 2000, Russell 2000 Value, and Russell 2000 Growth), large cap indices (S&P 500, S&P/Citi 500 Value, and S&P/Citi 500 Growth), a broad-based foreign stock index(Morgan Stanley Capital International Index for the developed stock markets of Europe, Australasia, and the Far East ("MSCI EAFE index")), an index of bonds (Lehman Brothers Aggregate Bond Index ("LB Agg.")), and the Nasdaq Composite Index. I have updated the chart (click on the image for a larger view) to reflect returns for 2008.
2008 was an awful year for stock indices, providing the worst calendar year returns since the 1930s. Despite the horrible 2008 returns, all of the indices tracked in the chart below have provided returns far in excess of inflation since 1980 (inflation has averaged somewhere between 3 and 4 percent since 1980). The Russell 2000 Value index has outperformed all other investment styles over the time frame, returning 2864%, which is an average annual return of about 12.40%. This is total return is especially impressive when one considers that Small Cap Value stocks lost over 28% in 2008. The overall formidable return of the Russell 2000 Value index is to be expected, given that Small Cap Value stocks have routinely outperformed other investment styles over long periods of time as I have previously discussed.
The Russell 2000 Growth Index is the worst performer since 1980, providing a total return of just 582% over the time period, or about 6.85% per year. The returns for Small Cap Growth stocks have been very poor since the 1980s and I question whether a return of just 2-3% above inflation since the 1980s is an adequate return for the excess risk involved in holding Small Cap Value stocks.
The S&P 500 Index dropped 37% - the index had its worst calendar year return since it was created in 1957. Including the S&P 90 Index, the predecessor to the S&P 500 index, the last time that a diversified large cap U.S. index dropped this much was in 1934, when the S&P 90 dropped over 43%.
Tech stocks also took a beating in 2008, as evidenced by the 40% drop in the Nasdaq Composite Index. That is the worst calendar year performance for the Nasdaq Composite since it was created in 1971.
International stocks were the worst performers of all of the indices I tracked last year, with the MSCI EAFE Index dropping over 43% after several years of impressive returns. The MSCI EAFE Index broke its 6-year winning streak over the S&P 500 Index in 2008. However, I suspect that international stocks will soon outperform U.S. stocks again, given that the U.S. runs an enormous trade deficit with the rest of the world and the U.S. dollar will inevitably weaken.
The only index providing a positive return was the LB Agg.**, which tracks U.S. government, corporate, and mortgage-backed securities with maturities of at least one year. The LB Agg. rose about 5.24% in 2008. Since 1980, the LB Agg. has provided annualized returns of about 8.88%, despite exhibiting far less volatility than the other stock market indices tracked in the chart below.
* I acquired most of the returns in this chart from old versions of the Callan "Periodic Table" of investment returns.
** The LB Agg. bong index has since been renamed the Barclays Capital Aggregate Bond Index ("BC Agg.").
*** Edit - January 2, 2017 ***
I have updated this chart with results through 2016.