Stocks, Historical Analysis

Lessons from over 100 years of market history are contained within this page. Professor Robert Shiller keeps his set of market data that dates from 1871 to current in a spreadsheet format. It is a very interesting set of data that contains earnings and dividend information on a month to month basis and can be easily manipulated since it is in Excel: http://aida.econ.yale.edu/~shiller/data/ie_data.xls

Overview of this Page

The above chart represents 104 years of stock market PE Ratios as uniquely defined by Robert Shiller. Shiller uses the inflation adjusted average from the previous 10 years earnings on the S&P 500 to calculate P/E ratios (2000, p. 7). What this does according to Shiller is smooth out the “. . . frequent boosts and declines that we see due to the business cycle” (2000, p. 7). The data for this chart (and page) was compiled by Yale proffesor & economist Robert Shiller. Robert Shiller is best know for writing the best seller "Irational Exuberance", published in 2000 just before the bear market selloff that followed. This page is an interpretation of Mr. Shiller's work. Neither myself nor this web site are associated with Robert Shiller.

This page has three parts:

Part I
By looking at 104 years of data and manipulating the data in a spread sheet, it is establish that average PE ratio for the last 104 years is 15.88491 (15.9).

Part II
By carefully comparing years 20 or more years apart, but with similar PE ratios, we can establish the real average return from investing in U.S. equities for the long term. We use several groups of years with similar pe ratios, ranging from high to low.

Part III
And finally, we look at the opportunities and risks of investing in equities at a point in time when stocks are cheap or expensive in relation to the historical average. (coming soon)

Part I

Historical Average PE Ratio

Jan, 1900 - June, 2004
Average PE Ratio
15.88491. (15.9)

To establish a historical annual PE Ratio for the time period Jan., 1900 - June, 2004:
The 1,253 months of Mr. Shiller's data where simply averaged (Total of monthly PE ratios / 1,253 months).

Source: http://web.archive.org/web/20070813063620/http://aida.econ.yale.edu/~shi...

Part II

Through the following examples (and above chart) we attempt to establish an average annual return from U.S. equities. We look at average results through the great depression, WW II, and high inflation eras among other unique decades in history. We do this simply by comparing individual years 20 or more years apart, but with similar PE ratios. The returns are not adjusted for inflation. They do include dividends. Average annual returns are rounded to the nearest percent. (Below in part III we discuss how to greatly improve our chances for success by buying more heavily in times of low valuations.) Annual returns are from Crestmont Research. (Crestmont Research has many on-line sources that are helpful for understanding equities in a historical context.)

Year PE Ratio
1922 7.5231
1982 7.3467

1922-1982 Average annual return 7%
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Year PE Ratio
1917 8.7829
1924 8.3719
1932 8.0703
1981 8.4632

1917-1932 Average annual return 2%
1917-1981 Average annual return 7%
1924-1981 Average annual return 7%
1932-1981 Average annual return 9%
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Year PE Ratio
1983 9.6421
1949 9.9018

1949-1983 Average annual return 9%
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Year PE Ratio
1914 11.0543
1943 11.0421
1974 10.9262
1985 10.6913

1914-1943 Average annual return 5%
1914-1974 Average annual return 7%
1914-1985 Average annual return 7%
1943-1974 Average annual return 9%
1943-1985 Average annual return 9%
1974-1985 Average annual return 11%
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Year PE Ratio
1934 12.1964
1951 12.0082

1934-1951 Average annual return 8%
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Year PE Ratio
1927 15.8568
1957 15.6140
1987 16.0149

1927-1957 Average annual return 7%
1927-1987 Average annual return 7%
1957-1987 Average annual return 8%
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Year PE Ratio
1905 19.3125
1936 19.2582
1962 18.8235

1905-1936 Average annual return 5%
1905-1962 Average annual return 7%
1936-1962 Average annual return 9%
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Year PE Ratio
1902 21.9570
1928 21.7894
1964 22.5534
1995 22.7207

1902-1928 Average annual return 7%
1902-1964 Average annual return 7%
1902-1995 Average annual return 7%
1928-1964 Average annual return 7%
1828-1995 Average annual return 7%
1964-1995 Average annual return 8%
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Year PE Ratio
1901 22.7365
1965 23.2626
1995 22.7207

1901-1965 Average annual return 7%
1901-1995 Average annual return 7%
1965-1995 Average annual return 8%
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Year PE Ratio
1929 27.6008
1996 25.9440

1929-1996 Average annual return 7%