Historical stock market performance

Studying the stock market history gives us insights into the likely future performance of the stock market. The most widely followed index is SP500 that represents well the US economy. The SP500 history shows us the following:

1. The SP500 earnings have been growing about 5.8% per year for the past 100 years. Long term, we expect the stock prices and dividends to grow at the same rate.

2. The SP500 prices have been growing about  6.5% per year. The price to earnings ratio (PE ratio) for the stock market is now higher than 100 years ago.

3. The dividends have been growing at 5.1% per year. This is slower than the price growth; consequentially,

4. The dividend yields have been decreasing. The current yield is about 2%.

5. The market discount rate or the rate of return that investor community demands of stock market is near all time low.

6. The payout ratio for large companies has been shrinking. This means managers of large companies like to retain a larger share of the company earnings and are more skittish at rewarding the investors than before.

7. The total stock market return has been around 9.9% annually. The total return has outpaced the earnings and dividend growth rates.

Although the past performance does not guarantee future returns, we can make the educated guesses about the future:

1. The future stock market price appreciation rate will be similar to the past or lower to be in line with the dividend growth rate of 5% per year.

2. The total long term return (dividend+price appreciation) will be 5%+2% = 7% per year. The inflation adjusted return will be lower. With the average historical inflation of 3%, the real future return will be around 4% per year.