The Impact of Starting P/E Ratio on 10-Year Stock Market Returns

(Last updated Sept 2020, but very insensitive to yearly changes)

One of the most dependable predictors of long-term stock market performance is the initial normalized price/earnings (P/E) ratio. This post uses a scatter graph to demonstrate the relationship that has existed between P/E and future returns over the past century.

Note: if you find the graph below difficult to understand, see Initial P/E and 10-Year Rolling Returns first.

Scatter Diagram: Starting P/E Ratio vs. 10-Year Stock Market Returns

The above scatter plot (click on image to expand) shows the historical relationship between the P/E ratio of the stock market at the time of purchase and the theoretical investors' returns over the next 10 years. We've looked at this relationship before; for example, Rolling Returns vs Initial P/E Ratios looked at the relationship of initial P/E and subsequent returns over time -- that is, with time as the horizontal axis. However, this time we're going to take time out of the equation; it's just starting P/E ratio vs. 10-year return -- "man to man" so to speak.

In the chart, each dot represents a hypothetical

Stock Market Returns through 2009

In case you haven't noticed, this blog takes a strategic, very-long-term view of just about everything. Most of the analysis and graphs deal with a century of data. In my view, another year or two of data is, in most cases, unnecessary. Generally, the message is the same whether you look at results through 2008, e.g., or through 2010. In those few cases where I think it most important, I will update posts/graphs annually; others will be updated much less frequently.

Since I only update a few key graphs annually, I thought it might prove useful to preserve last year's version of the "Market Returns Since 19xx" post for those readers who feel compelled to put the last dot on every chart. If the information below is not sufficient, the supporting data for all stock market related charts is available in my stock market analysis models on Google Docs.

Results Through 2009

The average yearly total return (i.e., including dividends) for the stock market for periods of 25 years or longer has been around 9-10%. Following are the results for some key periods ending at year-end 2009:

• The average total yearly return of the Dow Index from 1900 (end-of-year 1899) through 2009 was approximately 9.4%  -- 4.7% price appreciation, plus approx 4.7% in dividends.
• The return from 1929 (End-of-year 1928 -- i.e., before the crash) was 8.8% (4.5%, plus 4.3%)
• From end-of-year 1932 (i.e., after the crash) - 2009: 11.1% (6.9%, plus 4.2%)
• For the last twenty-five calendar years, the annual return was 11.9% (9.0%, plus 2.9%)
• For the last 20 years, 9.4% (6.9%, plus 2.5%)
• For the last 10 years, 1.3% (-1.0%, plus 2.3%)
• For the last 5 years, 1.9% (-0.7%, plus 2.6%)
• For 2009 the stock market (Dow/DJIA) total return was 22.0% (18.8% plus 3.2%)
• 2009 Year-end Dividend Yield was 2.7%
• For comparable results for similar periods ending the following year, see
  Average Stock Market Returns: 19xx thru 2010.

For lists of other popular posts, and a complete index of all stock market posts by subject area, see the sidebar on the left.

In all cases above, the returns are from year-end to year-end. In addition, by "stock market" I mean the DJIA (Dow Jones Industrial Average). The results would be essentially the same for the S&P 500.  Note: dividends prior to 1929 have been estimated based upon another stock market index.

Copyright © 2010.   Last modified: 1/4/2013

Key Posts, Charts Updated Through 2010

It just occurred to me that readers following this blog via the normal feeds (Google Reader, Newsgator, etc.) are only notified of new posts/comments. For readers not following Observations on Twitter (www.twitter.com/obsandnotes), where I announce not only new posts but key updates, following are a couple of Observations posts that have recently been updated to reflect stock market results through year-end 2010.

Stock Market Annual Performance Chart: The graph now includes 1929 through 2010
Average Stock Market Total Return: Now includes results for key periods from 19xx through 2010 (e.g., 1, 5 & 10 years, since 1900, 1929, etc.)

In addition, as you know, 2010 End-of-Year Stock Market Update includes shorter-term results such as for December, the fourth quarter, and since recent lows -- plus some key stats for the S&P 500 and NASDAQ. It also includes an update to the graph in 100 Years of Stock Market History.

Finally, the Stock Market Analysis Models have been updated to include 2010 closing prices and dividends.  I'll have additional updates when earnings become available around the end of this quarter.

For lists of other popular posts and an index of stock market posts, by subject area, see the sidebar to the left. This work is licensed under a Creative Commons Attribution 3.0 unported license. Last modified: n/a

2010 End-of-Year Stock Market Update

100-Year Stock Market Chart through 2010
Note: For 2011, see 2011 End-of-Year Stock Market Update.

December, 4th Quarter, Year-To-Date & Recovery-To-Date Review

The market ended the year with a bang, tacking on almost as many points in December as it had from January through November.  In the process, it set not only a new 52-week high, but a multi-year high.  The  DJIA (Dow Jones Industrial Average) ended the year at 11,577.51, after peaking at 11,585 on December 29th.  That peak was the highest close since August, 28, 2008 when the financial/credit crisis started the market on its stomach-churning crash to 6,547. At year-end, the dividend yield was 2.48%.

Almost no matter how you look at it, we're on a roll.  Here's how the December close stacks up against some earlier closes:

• From Prior Month Close of 11,007: The Dow is up 571 point (5.2%)!
  
• From 3rd Quarter Close of 10,788: Up 789 points (7.3%)
  
• From 2009 Close of