Long-Term Market Returns: Ritholtz Chart

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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One of my favorite charts to show people is about long-term market returns since 1900. I find it incredibly telling, in the information provided by a simple line chart.

This one is from JPMorgan's quarterly chart book, which I have referenced before. It's a delightful assembly, chock full of great graphics that both inform and amuse.

But the chart I want to focus on is Markets Since 1900. It shows the long-term gains of the Standard and Poor's 500 Index (and its predecessor). It is in logarithmic scale, so as to not distort the earlier returns.

The chart itself is deceptively simple: markets moving in a series of steps -- sideways, then higher, then sideways, then higher. These can be described as secular markets -- 10 to 20 years long, encompassing a specific era or period of time. The past few secular eras have included both bull and bear markets. Think about the post-war rally (1946 to 1966), the 1970's inflation and bear market (1966 to 1982), the technology and dot-com era (1982 to 2000), the tech bust and credit crisis (2000 to 2009) and the post-crisis recovery (2009 to present).

The long periods of time do not show exactly how volatile the markets can get. The 1970's, for example, appear to be a sideways affair, but were actually quite violent.

There are five rallies of 40 percent or greater: October 1966 for 47 percent; May 1970 for 73 percent; October 1974 for 64 percent; March 1978 for 62 percent and August 1982 for 41 percent.

Each of those rallies was followed by vicious sell offs: Starting December 1968 the markets were down 35 percent; January 1973 down 48 percent; January 1977 down 19 percent; and November 1980 down 27 percent. On the chart, this period looks like a long gentle sideways consolidation as the markets seemingly gathered themselves up for the next leg higher.

If you look a little more closely on the chart, and with the benefit of hindsight, you can pick out the periods where markets went vertical, only to crash and burn afterwards: 1925 to 1929; 1935 to 1938; 1987; and 1996 to 2000.

What makes this era so interesting is that since March 2013, we have cleared the prior trading range and are now in a new range. Increasingly, people are observing that this new range could be a new secular bull market.

What is your favorite chart?

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net