Historical Stock Market Performance and Fluctuations

Key Insight

Understanding stock market history, specifically its major price fluctuations and the relationship between stock prices, earnings, and dividends, is crucial for investors. Useful statistical data, though less dependable in its earlier half, extends back 100 years to 1871. This historical perspective reveals how stocks have broadly advanced over a century through numerous cycles, and how these three key factors have varied in relation to each other over successive ten-year averages. This extensive material provides a foundational background for assessing market levels at any given time, such as at the beginning of 1972.

The long-term history of the stock market includes nineteen bear and bull market cycles over 100 years, tracked using indexes like the combined Cowles Commission and S&P 500 index, and the Dow Jones Industrial Average (DJIA), which dates to 1897 and comprises 30 companies. Market fluctuations from 1900 to 1970 reveal three distinct patterns. The period from 1900 to 1924 saw typical 3-5 year cycles with an average annual advance of about 3%. This was followed by the 'New Era' bull market culminating in 1929, leading to a collapse and irregular fluctuations until 1949, where the annual advance rate was a mere 1.5%. The greatest bull market in history then began, presenting significant growth and reaching a culmination around December 1968, with the S&P 425 industrials at 118 and the S&P 500 at 108.

Within the 1949-1968 bull market, there were notable setbacks, like in 1956-1957 and 1961-1962, but swift recoveries meant they were categorized as recessions within a single bull market. The DJIA surged more than sixfold from 162 in mid-1949 to 995 in early 1966, representing an average compounded annual rate of 11%, plus estimated dividends of 3.5% per annum. The S&P composite index also showed significant growth, from 14 to 96. However, the subsequent decline from the 1968 high to the 1970 low was 36% for the S&P composite and 37% for the DJIA, the largest since the 44% drop of 1939-1942. Despite a massive and speedy recovery to new highs in early 1972, the annual price advance for the S&P composite between 1949 and 1970 was about 9%, but it slowed significantly in the last decade to 5.25% for the S&P composite and 3% for the DJIA. Corporate earnings experienced a definite deterioration in 1970, with profit rates on invested capital falling to their lowest since World War II, and many companies reported net losses, signaling a potential end to the boom era around 1969-1970.