Stock Market Post-Mortem

Now that the stock market has closed for the year, we can take a step back and survey the carnage. As is our custom here at IcebergCarwash, we will use the S&P 500 Index as our benchmark.

In 2008, as measured by the S&P 500, the U.S. stock market declined 38.5%.

While that number is ugly enough on its own, let's put some historical context around it. For background, consider that the S&P 500 Index reliably goes back to 1926. The full 500-stock index did not appear until around 1957, but the index existed in other forms for about 30 years prior to that point.

Looking at the annual (January 1st-December 31st) returns on the S&P 500 going back to 1926, giving us 83 years of annual performance statistics, we calculated the rolling, annualized 3, 5, 10, 25, and 50-year (when available) returns for each year, starting with 1926. For example, in examining the rolling 10-year returns, we looked at 1926 through 1935, 1927 through 1936, 1928 through 1937, and so on.

The research yielded some interesting information:

(1) This year's performance represented the second largest annual (January 1st - December 31st) decline in the Index's 83 year history, surpassed only by the 43.3% drop in 1931.

(2) The annualized three-year return (2006-08) on the S&P 500 is a negative 9.1%. Out of the 81 years in our database where trailing three year returns could be measured (1928-2008), only 13 three-year periods witnessed a negative annualized return.

(3) The annualized five-year return (2004-08) is a negative 2.7%. This has only happened 11 times out of the 79 rolling 5-year return calculations in our database.

(4) In order to get a really good feel for the historical stock market weakness we're witnessing, look at the annualized ten-year (1999-2008) on the S&P 500, which was a negative 1.6%. This represents the first time a ten-year investment period yielded a negative return since 1939, and only the third time overall (the 1929-1938 period also saw a negative return). The negative 1.6% annualized return for the period from the beginning of 1999 through the end of 2008 represents the worst ten-year return in the database. While our database only goes back to 1926, so this is speculating a bit, it is possible that 1999 through 2008 was the worst ten year period ever for U.S. stocks. The ten year period from 1869 through 1878 might have been worse; I'll have to check to see if anyone has data on a broad market index going back that far. It's really scary when you consider that the first year of that ten-year period, 1999, featured a 21% gain in the index. Absent a very strong rally next year, the period from 2000 through 2009 will look rather bleak as well.

(5) The annualized return on the S&P 500 over the past 25 and 50 years was 9.7% and 9.1%, respectively.

(6) Speaking of the long term, if you had invested $1 in the S&P 500 on January 1, 1926, you'd have $1,871.69 today. Or, more likely, your heirs would.

As a reminder, we're still taking entries for The First Annual IcebergCarwash Stock Market Prediction Contest.

To join, use the "comments" section of our earlier post to register your prediction of where the S&P 500 Index will be at the end of 2009. As a starting point, consider that the S&P 500 finished 2008 at 903.25.

Entries will be accepted until 9:30AM on Friday, January 2, 2009.

Good luck, everyone, and here's hoping for a better year in 2009.