What is the Average Stock Market Return?

The average stock market return might not be what you think.

After a decade-long bull market, what can you really expect from the market? What’s the average stock market return and what's a realistic return for investors?

In this video, I’ll show you the history of bull and bear markets to find that reasonable return. We’ll look at what’s caused stock market crashes in the past and more importantly, what investment returns you can expect from the future.

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Stock Market Returns are Not as High as You Think

The market is crazy lately and I’m not talking about the up-and-down roller coaster we often see with stocks, I’m talking the expectation that the good times will last forever.

Over the last ten years, stocks have more than doubled and only with a couple small corrections along the way. The financial pundits are again telling people to expect double-digit returns and nobody is questioning their sanity.

This is exactly the point where you want to take a look back for a little reality check.

Now I’m not calling for a stock market crash or even trying to predict a recession. What I want to do in this video is just give you a realistic idea of average stock market returns, bull and bear markets and what you can expect from investing.

Not trying to rain on your party. I’m really not trying to be the pessimist but I do want to do two things here.

First is by giving you a realistic expectation of investment returns, you’re going to be able to better plan how to reach your goals. You see, a lot of people expecting those 10%-plus returns to go on forever are going to be disappointed when returns fall short and they haven’t saved enough. You’re going to be able to see exactly how much you need to save even on the more realistic returns.

Second though, is by readjusting your expectations on returns for stocks, I’m hoping to keep you from the bad investing behaviors that kill a portfolio. Knowing what’s realistic for stocks, bonds and real estate returns, you’re less likely to chase after the hot stocks and then panic-sell when they don’t live up to the hype.

How Long are Bull vs Bear Markets?

So let’s look first at this data by Mackenzie Investments on a composite S&P and TSX index, so this is data on US and Canadian stock markets. We’ll look at some bear markets going back to the 1930s but I like to use the broader data back only to 1956 for a more modern perspective on the markets.

There have been 12 bull markets since ’56 though there’s some argument whether the 2001 gain was a real bull market or just a quick bounce in the 2000 crash. On average, stocks have jumped 129% from the low of the previous bear market and have rallied for 54 months.

Now on that last point, it does seem like bull markets are lasting longer than they have in the past. Five of the last seven bull markets have all been over that 54-month average so the number could be skewed a little low by older data.

There have also been 12 bear markets of a 20% drop or more since 1956 with stocks falling an average of 28% and for that plunge in prices lasting an average of nine months from the previous highs.

So a couple of points to get from this graph before we look at what’s caused bear markets and average returns going forward. First is that the current bull market is definitely not typical.

Ten years of almost straight-up stock prices is a long time to go without a hiccup. Even if we consider bull markets are getting longer, ten years is more than double the longer-term average length.

Also though, that 176% return since 2009 might be above the average bull market but isn’t what you’d expect from a ten-year old bull. It’s one of the things the optimists have pointed out for why the market can keep going, saying that stocks haven’t exactly boomed like they did in the 90s so there isn’t that sense of euphoria you usually get before a crash.

What Causes a Bear Market?

But if bull markets don’t die of old age, what does cause a crash? What are the factors that usually bring a stock market crash and are they a threat to returns now?

Recessions and just the fear of a slowdown in the economy are the most common reason for a stock sell-off. More than half the past 12 bear markets have been caused by an outlook for negative economic growth and unemployment.

On this one, we don’t seem to be in too much trouble just yet. Unemployment is still at historic lows and wage pressures aren’t to the point where they’re hurting corporate profits and driving layoffs. There is some worry about manufacturing and recent surveys point to a slowing industrial sector in the US but it’s not bled into the rest of the economy. The biggest warning signs are the developing trade war and its potential affect on consumer prices but no real sirens yet.

Extreme stock valuations have caused bear markets in 1981, ’87 and the 2000 dot com crash. Stocks are an ownership of future profits so the value is tied to those expected cash flows. Normal would be for stock prices to rise about at the rate of earnings growth. Now when investors get over-excited, stock prices detach from that intrinsic valuation.

Are Stocks Expensive?

This chart from FactSet shows the forward price-to-earnings ratio for the S&P 500 and the 11 stock sectors it tracks. Now most of the time you hear price-to-earnings, you’re looking backwards so stock prices divided by corporate earnings over the past year.

This forward PE ratio is the stock price divided by earnings analysts are expecting for stocks in each sector and for the market as a whole over the next year. It’s a little different but still useful in the comparison we want to do.

So the chart shows that current PE ratio in the dark-blue bar along with the five-year average in light blue and the 10-year average PE ratio in green. What you immediately see is that stocks are getting more expensive in almost every sector with that current PE ratio well above the ten-year average.

Taking a closer look at the numbers and you see just how expensive some of the sectors have become.

The overall market, the S&P 500, is trading at 17-times the earnings expected over the next year. That’s almost 15% more expensive than that 14.8-times average over the last decade. Even more expensive, you’ve got sectors like Information Technology trading more than 30% over its ten-year average. I’ve added the percent premium or discount above each sector so you can see just how expensive some of these sectors are.

In fact, the only sectors that don’t look dangerously expensive are energy, which is still reeling from the 2014 selloff in oil prices, Industrials, Healthcare and Financials.

Now understand…when I say dangerously expensive, it’s from the perspective of a die-hard value investor. I hate buying stocks when they’re even a little bit expensive so, yeah a little biased on this one.

The truth is that stocks aren’t ridiculously expensive compared to other bull markets. Not to the point we saw in the dot com bubble or in the 70s and 80s. Even if stocks were trading at higher prices, this isn’t one that usually causes a crash in itself because investors are perennially positive. It’s the nosebleed valuations that just make it more likely that another catalyst, for example the Fed raising interest rates like it did late-1999, will start a crash.

Will the Fed Cause a Stock Market Crash?

Speaking of the Federal Reserve, that’s another common cause of falling stock prices though I hate to put the blame on the Fed.

Look, the people on the Federal Reserve Board are public services, very highly educated and experienced ones, trying to help the economy avoid the worst outcomes. Their mission is two-fold, full employment and stable prices but these are sometimes competing missions.

Full employment is great but if it comes at the expense of consumer prices surging as much as 13% a year, as they did in 1980, then the Fed has to raise rates to fight inflation. Even worse, sometimes we get inflation without economic growth and the Fed has to walk an even finer line.

It might be politically-easier if the Fed kept throwing money into the system but it’s just not responsible and would leave the central bank with no ammunition to lower rates when a recession does come.

Anyway, the Fed has been blamed for a few recessions and bear markets, especially in the 80s when Chair Volcker took short-term rates to 20% to fight inflation. Right now, it doesn’t seem to be the case. While Chair Powell isn’t giving President Trump the zero-percent rates he wants, the Fed is cutting rates to keep the economy growing.

Will China Cause a Stock Market Crash?

Finally before we look at the average stock market returns over the last decade and what to expect going forward, understand that external shocks can also cause stocks to fall fast. Nearly half the bear markets since the 30s haven’t coincided with a recession.

Against those main causes we’ve looked at, these are usually unexpected and external shocks. Some examples include Hitler’s invasion of Poland in ’39 that brought a 32% drop, the attack on Pearl Harbor in 1940 that saw a 35% plunge. The 1961 flash crash took stocks down 28% and has never really been rationalized and then the currency crisis in 1998 that saw markets drop 20% before heading higher in the dot com bubble.

Historical Stock Market Returns

Now I want to look at the average stock market returns over the last decade and maybe why you should look further out for what to expect.

The S&P 500 has risen 11% on an annualized basis since 2009, more than 10 years but is that realistic? If stock prices are a function of that earnings growth…and corporate earnings grew at less than 5% year-over-year last quarter, how long can stock prices surge higher?

In fact, the average annual return since 1957 is 8% and we’re going to look at some analysis next that shows returns could be even lower than that over the next decade.

What is a Good Return on Investment?

Before we look at that research on stock returns going forward, it all begs the question, “What is a good return on investment?”

The question itself is dangerous at best. Is 4% good…why not 8% or 15%? Reaching for an arbitrary return just means investors keep reaching into more risk…and eventually are reminded what happens with that risk.

A good return then is getting the return you need to meet your goals. That means knowing what your goals are in the first place and then a reasonable return to get there.

It’s something I’ll talk a lot about in a free webinar I’m planning on goals-based investing. It’s a strategy I developed working with private wealth managers and aligns your investing back to your own personal goals.

Reserve Your Seat Now for this FREE Webinar! Get my exclusive goals-based investing strategy!

What will Stock Market Returns Be Over 10 Years?

Now I had planned on looking back to show you the average returns by asset but instead, I want to look forward. That’s what’s really important, right? Those returns you can expect in the future, rather than what we’ve seen in the past.

So let’s look at some research by fund provider Blackrock, estimating the 10-year expected returns and what it means for your investments.

What we see is a chart of 21 sub-assets; that’s 12 types of debt investments, five equity investments, real estate and some alternative assets. The chart shows the forecast returns with circles and the uncertainty around each.

For example, there’s huge uncertainty around private equity returns, that far-right bar. The average expected return is 13.2% over the next decade but in actuality, it could be near zero to over 25% annually. That’s a combination of the uncertainty in the research plus that normal volatility in an alternative investment like private equity.

Now we’ll look at some of these but understand these estimates are nominal returns, that’s without adjusting for inflation. These are the headline returns Blackrock expects though inflation will likely eat away at around 2% of the value in each of these.

I’ve highlighted six investments here in three assets; stocks, bonds and real estate with the exact estimate for ten-year forward returns.

Average Returns by Asset Class

US government bonds, that 10-year Treasury, are expected to yield a 1.7% return over the decade and US bonds are actually the bright spot. Globally more than $15 trillion in government debt trades for negative interest rates, German 10-year bonds yield a negative 0.6%, people are actually paying to hold their money in the bonds.

That means investors from all over the world are pouring into US Treasury debt for that positive return and pushing down long-term US rates. Bond returns have been great this year on a huge slide in rates but that expensive valuation means returns going forward will probably be weak at best.

There’s no end in sight to rock-bottom global rates and this is going to be a real problem for retirees, pension funds and insurance companies that need a safe and stable yield.

US credit, so investment-grade bonds, are expected to yield a little more at 2.3% over the decade. That in itself is pretty amazing that corporations will be able to borrow at rates so low. We’re already in a corporate bond bubble with debt piling up on balance sheets and this is one of the most likely causes of a coming crash.

High-yield corporate bonds are expected to yield 4.7% but before you rush to put all your money in non-investment grade debt, remember these are also called junk bonds for a reason. These companies will get slammed when a recession does hit and the return could be much lower than that average estimate.

Next here, these US equities, so we’re talking the S&P 500 here, is expected to produce around a 6% return over the decade. That’s a pretty far cry from the 11% return over the last decade and I know a lot of you are skeptical.

Just understand, there will be a recession, likely more than one, in the next decade and probably within the next few years. It’s all but guaranteed. Look back at that bull versus bear market history from earlier and you see that a crash can wipe out a third of the market in a heartbeat.

So even if you don’t agree with that 6% return estimate, I think 8% would be the best anyone could hope for. Remember, we’re already at a high price-to-earnings valuation. Interest rates are already extremely low and not really helping to drive economic growth. There just aren’t a lot of positive signals for stocks.

Small cap stocks, so those smaller companies that are more risky but supposed to produce higher returns, are expected to do just that with a 6.3% annual return. That’s not much extra but it adds up and I think every investor should have some exposure to these small caps as well as the larger companies.

Finally, look at the expectation on real estate investments because I think this is really interesting. Blackrock expects US commercial property to underperform stocks, producing a 5.3% annualized return. I think a lot of that is on the assumption that rates will generally be going up over the period because they’re so low right now and rising rates are mostly bad for property investors.

The uncertainty on the real estate forecast is interesting as well though, much wider than that of large-cap stocks. So while property is expected to underperform the S&P 500 by about 0.7% a year, it could do much better or much worse.

Two things I think you should take from this chart. One is that returns are likely lower over the next ten years compared to the previous. If you’re planning your nest egg on 11% returns…you’re going to be disappointed and not saving enough.

Plan on a blended portfolio of stocks, bonds and real estate producing maybe around 5% if you’re lucky and save accordingly.

Also, notice there’s a lot of uncertainty around each of those estimates. Stocks of large companies are expected to produce a 6% annualized return but it could be in the low single digits or as high as just over 10% over the next decade. That means you really need to be mixing these different assets, putting a portfolio together of stocks, bonds and real estate. It’s not about just going all-in on stocks and hoping for that 10% annual return. It’s about spreading your risks around to make sure you get the safety of bonds and the upside potential of other assets.

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