The S&P 500, or Standard & Poor's 500, was first introduced in 1923 as an index of 233 companies by Standard and Poor's. In 1957, the index was expanded to include 500 companies and is in its current form. The S&P 500 is a market-cap-weighted index of the 500 largest publicly traded companies in the United States and is considered a leading benchmark for the stock market.
The S&P 500 is in the 15th year of the bull market since it exited the Great Financial Crisis in 2009. The COVID-19 crash in 2020 and the 2022 inflation scare were just interruptions. Are we due for a proper bear market or has the bear gone the way of the Dodo bird? This is a difficult question to answer and let me say upfront that I am none the wiser but let's use the entire price history of the S&P 500 and see if it offers any clues. The S&P 500 daily price is available from Yahoo Finance beginning in 1927. We can use this price series to calculate the CAGR (Compound Annual Growth Rate) of the S&P 500 over a certain rolling window period.
20-Year Rolling CAGR
Let's start with a rolling window period of 20 years. This is also the window period Singapore's sovereign wealth fund, GIC, uses in its performance reporting.
The 20-year rolling CAGR experienced wide swings over the years. It can go as high as 14% from 1980 to just before the tech bubble burst at the turn of the century. It can also be negative from the Great Depression years through WWII. The next difficult 20-year period is during the 1970s stagflation. The good news is that we just exited the most recent difficult period marked by the 2001 Tech crash and the 2008 Great Financial Crisis. Seen with this light, it looks like there are still some good years ahead for the S&P 500.
40-Year Rolling CAGR
We now use a longer rolling window period of 40 years to see the longer-term trend. 40 years is sufficiently long to reduce the impact of any outlier years such as the ones seen in the 20-year example above. This should allow us to see the longer-term trend better.
The 40-year rolling CAGR is more stable than the 20-year rolling CAGR. This is to be expected. What is surprising is that it has been trending up over the years. This is perhaps the result of the US coming out of the Great Depression in the early years, followed by becoming the world's most powerful country after WWII. However, the fact is that we are near the peak of the 40-year rolling CAGR. Can this trend continue indefinitely, reach a permanent plateau, or are we due for mean reversion? Only time will tell.
What about other countries?
Since we are doing this exercise, let's look at some other countries' stock market performance. Let's start with Japan since it just emerged from its lost decades. Yahoo Finance's daily price data for the Nikkei 225 goes back to 1965. This is a shorter history than the S&P 500 but still enough to generate both the rolling 20-year and 40-year CAGR.
The rolling 20-year CAGR for the Nikkei 225 suggests that Japan is emerging from its long battle with deflation. But what does the rolling 40-year CAGR look like?
The 40-year rolling CAGR suggests that Japan is still stuck in low growth but to be fair, it requires a few years of strong performance for the Nikkei 225 to move the needle on the 40-year rolling CAGR. Next, let's look at Germany and Hong Kong. The German DAX and the Hang Seng Index have a relatively short price history on Yahoo Finance. We are only able to see their 20-year rolling CAGR.
Germany also suffered a tough 20-year period from the bursting of the Tech bubble and the Great Financial Crisis. Finally, let's turn to Hong Kong.
Given what has been happening to Hong Kong over recent years, it is not surprising that the HSI's 20-year rolling CAGR is in steady decline. If Hong Kong can turn its fortunes around, this might mark the low of the 20-year CAGR. If not, we might see a negative 20-year CAGR soon.
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