The US stock market rebounded sharply yesterday, dispensing the biggest daily gain in two months. But the latest surge doesn’t change much for the trailing 10-year return, which remains well below its median for the rolling decade-long changes posted over the last 50 years. That may or may not be relevant for developing intuition about future performance, but it’s a reminder that the recovery in the US stock market in recent years still pales relative to previous boom in the 1980s and 1990s.
For some perspective, let’s review the evolution of the rolling 10-year annualized return for the S&P 500 over the past half century through yesterday’s close (May 24). Even after Tuesday’s 1.22% pop in the S&P, the index is up by a middling 5.1% annualized for the trailing decade (green line in chart below), according to Standard & Poor’s. That’s a respectable gain, perhaps, after adjusting for the economic environment in the post-2008 world order. But it’s mildly disappointing relative to the 7.3% median annualized 10-year return for the S&P for the past 50 years (blue line).
For another view, here’s how rolling 10-year S&P 500 returns stack up via a boxplot chart. The current 10-year performance is indicated by the green square below, which is moderately below the median (horizontal black line). The shaded box in the middle reflects the interquartile range of 10-year returns since 1961.
History suggests we should expect a degree of mean reversion around the median over the long sweep of the past half century. But the rebound of the 10-year annualized return in recent years has, so far, been weak compared with the previous revival in 1980s and 1990s following the correction in the 1970s. Is this a sign that it’s time to manage expectations down for US equity returns? Or is the trailing 10-year return destined to rise further in the years ahead and forge above the median? Or could it be that the previous rebound that pushed the 10-year return above 15% at one point was excessive and so it’s misleading to even consider a repeat performance?
No one knows the answer, of course, but at least we know what’s required if history is set to repeat: a strong run of growth in the economy generally and corporate earnings in particular. At the moment, however, expectations are subdued on those fronts. The Atlanta Fed’s second-quarter nowcast for 2.5% GDP growth is respectable, but hardly the raw material for boosting the stock market performance by a hefty degree. Meanwhile, earnings growth has been “tepid” lately, notes The Wall Street Journal. Perhaps, then, it’s no surprise that forecasts for the US equity risk premium have been recently hovering in the modest 4%-to-5% range (see here, for instance).
The outlook for equity performance isn’t terrible, but it’s not obvious that the trailing 10-year return is poised to reclaim lost ground and rise above the median result any time soon. That doesn’t mean that we won’t see a 10-year performance for the S&P in the upper reaches of historical results. But for the time being it seems that the recovery in the 10-year return has fallen on hard times relative to the historical record.