Stocks Go Up...And Down

A discussion of historical stock market dips including frequency, depth, and duration illustrated with a number of new related charts.

The long term trend in most stock markets is up. This is certainly true of the U.S. stock market. The following chart of the S&P 500 stock market index is how this trend is often portrayed:

The previous chart makes it appear that the historical stock market has been in a strong exponential upward trend with a few relatively minor and short downward hiccups. Unfortunately, this chart is very deceptive. First of all, to illustrate the percentage changes in this stock market index, the index dollar values need to be plotted on a log scale. This is because a 50% increase from $1000 is a $500 move, while a 50% increase from 100 is a $50 move. A $50 50% move would be invisible in the above chart. With a log scale, both 50% moves would have a similar size on the chart. You can seen the difference this makes in the next chart with the same data graphed on a log scale.

Unfortunately, the previous chart is still deceptive. The problem is that the units are in U.S. dollars, and, due to inflation, the value of the U.S. dollar has fallen significantly over time. To deal with this problem, inflation adjusted (current) dollars can be used. The next chart does exactly this. The word "real" means adjusted for inflation.

The real S&P 500 index graphed in the above chart is a reasonable representation of overall U.S. stock market performance over time. It does still show a real, long-term upward trend in the U.S. stock market. Closer inspection, however, reveals that the stock market has also gone down, sometimes significantly and for extended periods of time. This next chart is the same as the previous chart except that the biggest market peaks have been labeled with horizontal lines. The location where these horizontal lines next intersect with the S&P 500 line is the point in time when an investment at that peak would be worth the same amount as originally invested. At all points in between, the investment would be worth less.

In the last century or so, the U.S. stock market has had four major bear markets that averaged a decade from peak to trough. For these bear markets, the average time for an investor who invested at the peak to recover their money was more than two decades. The average loss from peak to trough was nearly 70%. The following table shows the details for each bear market.

The data discussed so far cover only about one century in one stock market. This is way too small of a data set to represent all possibilities. Here is one more chart representing the Japanese stock market.

In 1989, the Japanese stock market peaked, and at the time of this writing roughly thirty years later, the Japanese stock market is still roughly 50% below the peak of 1989.

Therefore, stock markets do, indeed, go down. Sometimes significantly and for long periods of time.