# Historical Performance of US Markets

## Historical Picture of Returns to Stocks


### Learning Outcomes

By the end of this section, you will be able to:
1. Explain overall equity market behavior over various historical periods.
2. Explain different equity style and size behavior over various historical periods.
3. Extract various equity market performance results from plots and charts.

### Using Graphs and Charts to Plot Equity Market Behavior Stock Size Considerations

The Dow Jones Industrial Average (DJIA), also known as the Dow 30) and the S&P 500 Index are the most frequently quoted stock market indices among scholars, businesses, and the public in general. Both indices track the change in value of a group of large capitalization stocks. The changes in the two indices are highly correlated.
It may be fair to question if either index is a good representation of the value of equity and the changes in value in the market because there are over 6,000 publicly traded companies listed on organized exchanges and thousands of additional companies that trade only over the counter. As of year-end 2020, the S&P 500 firms had a combined market capitalization of $33.4 trillion, about 66% of the estimated US equity market capitalization of $50.8 trillion.Spencer Israel. “The Number of Companies Publicly Traded in the US Is Shrinking—Or Is It?”  It is widely agreed that the performance of the S&P 500 is a good representation of the broader market and more specifically of large capitalization firms.
 provides a visualization of how S&P 500 stock returns have stacked up since 1900. This figure makes it clear that equity returns roughly follow a bell curve, or normal distribution. Thus, we are able to measure risk with standard deviation. A lower standard deviation of returns suggests less uncertainty of returns and therefore less risk.
Capital market history demonstrates that the average return to stocks has significantly outperformed other financial security classes, such as government bonds, corporate bonds, or the money market.  provides the return and standard deviation of several US investment classes over the 40-year period 1981–2020. As you can see, stocks outperformed bonds, bills, and inflation. This has led many investment advisers to emphasize asset allocation first and individual security selection second. The intuition is that the decision to invest in stocks rather than bonds has a greater long-run payoff than the change in performance resulting from the selection of any individual or group of stocks.
 demonstrates the growth of a $100 investment at the start of 1928. Note that the value of the large company portfolio is more than 50 times greater than the equal investment in long-term US government bonds. This supports the importance of thoughtful asset allocation.
Still, the size of a firm has a significant impact on how investors choose equity securities. Capital market history also shows that a portfolio of small company stocks has realized larger average annual returns, as well as greater variability, than a portfolio of large companies as represented by the S&P 500. Small-cap stock total returns ranged from a high of 142.9% in 1933 to a low of -58.0% in 1937.
More recently, the differential return between small and large capital stocks has not been as pronounced. From 1980 through 2020, the Wilshire US Small-Cap Index has averaged an annual compound return of 12.13% compared to the Wilshire US Large Cap Index average of 11.82% over the same period. The 31-basis point premium is much smaller than that realized in the 1926–2019 period, which saw a small-cap average annual compounded return of 11.90% versus 10.14% for the large-cap portfolio.

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Stocks have produced the greatest average annual rates of return of the money and capital market assets discussed in this chapter. Stockholders bear more risk than bondholders or money market investors and receive on average higher average annual returns. Despite the relatively high average annual rate of return for portfolios of stock, history shows that the equity markets earn negative annual returns about 25% of the time. The negative returns realized by equities occur far more often than the negative results realized by money market or debt market instruments.

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