Does Historical Data Lend Credence to a Long-Term Optimism?

What has been presented above might make you question my optimism. In my opinion there is a great deal of apathy.   Rarely does anyone that discovers what I do for a living ask me about an investment.   Yet it is extremely important to remember that eventually the significant length of a “Bear / Flat period” will end. 

From the end of 1999 through the end of 2015, the market has had an annualized total rate of return of only 4.018%.  Yet the average annualized total rate of return for 130 of the 16 year rolling market periods since 1871 has been 9.343%.   The underperformance is so pronounced that the 2000-2015 time period is the 9th worst in the 130 of the 16 year rolling market periods.   The only 16 year rolling periods which performed worse than the current trend are presented on the next page with their corresponding annualized total rates of return (“AROR”):

                                                Time Period            AROR%

                                                1929-1944:             1.819% 

                                                1881-1896:             2.522%

                                                1928-1943:             3.161% 

                                                1926-1941:             3.263% 

                                                1882-1897:             3.699%

                                                1927-1942:             3.832%

                                                1880-1895:             3.838%

                                                1906-1921:             3.912%

Except for the last period on the list which went through the creation of the Federal Reserve, the Income Tax and World War I; the other periods overlapped the Long Depression of 1873-1896 and the Great Depression / World War II.

While all of this is bleak, there is a bright side to the data presented above.   Subsequent to when the period ended for 8 of the worst 16 year rolling periods, the average annualized total rate of return over the following 16 years was 13.288%!  This is significantly higher than the average of the 116 rolling 16 -year average annualized total rate of return which was at 9.694%.

To exemplify the historical nature of rolling 16 year periods, we have included the following chart which shows the performance of rolling 16 year periods followed by the performance of the next 16 years.   For example if you looked at the Red Line, the 4.018% would represent the annualized total return performance of the market from 1/1/2000-12/31/2015.  So an investor that put their funds in the market on the first day of that the period would have earned that as an annual total return for the next 16 years.   The Blue Line will have the same results as the Red Line but does so with a different vantage point.  An investor looking at the Blue Line can understand where the market has been over the last sixteen years and make an objective determination if the market might be in a Bull / “Bear / Flat” market.   The Red Line provides a hypothesis of where the market “may be going based on historical performance”.

I know contemplating where the market will be heading in the future by looking at a chart is rather difficult in relation to the current market environment.  Today’s outlook is so pessimistic because very few people are confident in either the direction of the country, the policies being implemented or the political process which we are witnessing.  People of all socio-economic backgrounds seem to be demoralized by the choices we are being given regarding the Presidency or other leaders.    While we all may have some choice for the Presidency or other leaders; the fact remains that approximately 70% of the country believes we are heading in the wrong direction.

That being said, I want to emphasize that our current time is no different than what has happened since 1871 (and even before that).  The problems faced by previous generations might have been technically different, but they were just as daunting then as to today’s problems.

History is also replete with periods of hand wringing and a reason not to invest.     Can you imagine being a person in their mid-40’s losing everything in the Great Depression and still have the fortitude to begin investing in the markets again during a period where the market dropped 90% from its highs in 1929 to the lows in 1932?  In another example consider the investor in the early 1950’s still committing resources to the market despite the threat of a nuclear attack from the Soviet Union under the direction of Josef Stalin?  How many times have you heard the stories over the years, especially during the cold war, where the school children had to practice hiding under their desks in the event of an attack?

How about the Bay-of-Pigs in the early 1960’s, the assassination of JFK, the rampant inflation as a result of the oil embargo, the massive loss of jobs and 21% mortgages in the late 1970’s/early 1980’s?  

Today the deficits are always a major concern for the psyche of many, if not all, Americans.  Approaching $20 trillion is not something to take lightly.  However, on an inflation adjusted basis the interest payments on the deficit is actually roughly the same level as it was in 1988!!

I am not trying to say there aren’t any significant risks.  Quite the contrary, there are those that keep investors up at night.  Yet there is no way to calculate the effect of another large scale terror attack or other systematic events that create an outlier which might delay the eventual return of a long-Bull Market.    I can give you scores of reasons why you should be pessimistic.  I don’t discount that mindset, but I also know that few believe in a future where the market could go significantly higher over a long period of time.   Think about it!

Final Thoughts

Obviously my prognostications cannot be guaranteed.  In fact, I may be wrong with the beginning date of the next Bull Market.  It might not occur in 2016.  Rather it could be sometime in the next few years.   Remember there won’t be any bells tolling or an exact point as to when it will occur.   In fact many investors and pundits won’t even recognize it.  However, once it begins there is a high probability that the market will embark on a long and glorious Bull Market. 

Yes, within the Bull Market, as previously stated, there will be fits and starts.   No trend ever follows a linear pattern.  All you need to remember is that during 1987 we had a crash and despite that we had an exceptionally powerful rally afterwards. 

But if one believes in market history; then you have to like the odds that we are much closer to embarking on the journey to much higher prices.    We just need patience and a belief in the future.  For if we lose both, then in my opinion, no investment (including cash, gold or Treasuries) will have any value as we will face a much larger crisis.

Thank you for considering and reflecting on my thoughts. I would value any comments and questions you may have. 


Underlying source for market data and TRG analysis presented is  Past performance should not be viewed as a guarantee of future investment returns.  Data has been gathered from sources believed to be reliable; however we do not make any claims as to their accuracy or completeness. It is not possible to invest directly in the S&P 500 index. Exposure to an asset class represented by an index is available through investable instruments based on that index. Returns for the S&P 500 index are presented with dividends reinvested.


Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.