Stock Market History, Illuminated, 2022 Style

I’ve been keeping a graphic of the long-term performance of the US stock market for many years now. In late 2017, I started blogging (and set up atwitter account), and at the end of each year since I’ve been sharing this information in the histogram below. I think it does a reasonable job of revealing how long-term returns are manufactured and the tilts over time. I’ve color-chunked the data by decade to highlight decades of historical weakness as well as periods of strength.  

I’ve also added additional tables and charts which I think are interesting, and in some cases, stunning. You can scroll down to follow along. But first, the histogram:

And before you raise hell about using the Dow instead of the S&P 500 in the histogram, there isn’t really much difference here over the long term. I just wanted more years of data, so used the Dow (starting in 1896). I have total return data for the S&P starting in 1936.

I also like referencing the Dow. I can’t help it. So call me a Boomer. I also like Alice in Chains though, so more accurately described as Gen X.

Looking at the data more recently, it reveals just how incredible the US stock market has been.

Since 1980, the market has been up for the year 83% of the time.

And despite its poor performance this year, cumulative market returns since 2009 have still been incredible. Two down years, 12 up years. The two down years were mid-single digits, while the 12 up years were high-teens.

Last year I commented “this makes me wonder if anyone under 30 – through no fault of their own – thinks that this is the way markets always work?” Well, despite how surprising and awful this year felt for many younger investors, the Dow itself was only down about 7% in 2022. That wasn’t really a big move. You can see in the histogram above that we’ve had plenty of years that were worse.

And yes, it is true that the S&P500 (down 18%) was much worse than the Dow Jones Industrial Average in 2022, but that is because the SPX was/is more heavily weighted to the growthy, bubble-esque names; and this followed 6.1% SPX outperformance in 2019 (over the Dow 30) and 8.6% outperformance in 2020 (both indices were up about 21% in 2021).

And then here in 2022, when comparing to most major markets around the world (and using the S&P 500) the US finally fell down the league table.

Yet if we do a three-year lookback, US outperformance is still extremely impressive, and only beaten by that in India.

And if we go back through the beginning of the last decade, the US stock market has still blown all other major markets out of the water. Significantly.

Of course, we all have different reasons why we think this happened, and we all have different views if 2022 was just a blip, or if the outperformance can continue. I don’t have the answers, but at some point down the road, we all will.

That answer will be that US outperformance from 2009 to 2022 (or beyond) was either driven by something economic(interest rates, free money, tech stock dominance), something fundamental (sales growth, improving ROICs, earnings upgrades), something less so (flows, narratives, memes, psychology, FOMO), or a combination of the three.

It is also not impossible that US outperformance was driven by nothing specifically (aka it just happened).

If there is an answer to what drove this historical outperformance, and we know the answer, then we probably are closer to understanding how sustainable it is or it isn’t.

Clues to the answer may be embedded in the comparative performance of growth and value stocks during the same period. To be clear, this doesn’t mean that outperformance of one over the other was irrational, and it doesn’t mean it wasn’t; but comparing value and growth returns (and decomposing them into fundamentals and multiples) may help us to understand how much (if any) of the outperformance or underperformance was driven by fundamentals, economic policy, flows, narratives, or whatever.

And it has been one hell of a decade (plus three years) for US growth stocks.

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Here in 2022 specifically, the trend seems to have reversed. That may be temporary, or it may not.

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For those interested in avoiding, adding, or revisiting, exposure in Europe; the same drivers seem to have affected things over the past year. And while European growth stocks have outperformed the US during this sell-off, European value stocks have – strangely – continued to underperform their US counterparts.

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Moreover, an analysis of the last 13 years reveals that whatever it was that was driving the underperformance of value was more pronounced in the US than it was in Europe.

And reordering this same information, we can compare the performance of value in one region to value in the other, and the same for growth. We see here, interestingly, that value stocks in the US – even during this period of severe underperformance vs. growth – crushed value stocks in Europe.

Similarly, we see that growth stocks in the US destroyed growth stocks in Europe.

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So, what does this all mean going forward? Not just the geographic question about where to invest, but the bigger (I think) question about the performance of growth and value stocks.

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Well, let’s get back to basics. Starting in the US, for much of the last decade, particularly in the growth space, we saw significantly more fundamental improvement from 2010 through 2016 in US growth stocks than in US value.

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Subsequently, from 2016 through the onset of the pandemic, earnings for value stocks actually performed similarly to growth stocks (although, as we know, that was not the case for their share prices).

Then, starting in early 2020, the COVID panic put much more pressure on fundamental expectations for value than growth.

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The net of all this is that since 2016, the fundamentals for US value stocks have improved by over 50%, while the fundamentals for US growth stocks have improved by nearly 90%. And sure enough, to accompany the 51% improvement in fundamentals for value stocks, we saw a 97% increase in their value.  

Moreover, accompanying the 90% improvement in growth stock fundamentals, we saw a 132% move higher.

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So, after this year’s correction, and since 2016, growth stocks and value stocks have similarly outperformed their fundamental improvement (as measured by earnings expectations).

In terms of what to expect tomorrow, in our view - with at least some of the froth out of the market (maybe all of it?)- we have to focus on fundamentals going forward.

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 And we do see that in 2022, earnings expectations for value stocks actually increased, while they started falling for growth stocks.

Moreover, after peaking in 2020, we have seen multiple contraction (P/E multiple on forward earnings) for both value and growth indices.

And it is a similar picture if we use the Russell Indices instead of the S&P.

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When we put our global hat on, what is potentially interesting here is that – despite the US stock market selling off in 2022 – it has (strangely?) maintained its premium to Europe.

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Now here comes the really counterintuitive part, or least something that surprised me when we noticed it last year.

When you decompose the market multiples into premiums paid for growth stocks, I expected the premium to be higher in the US.

It wasn’t.

The premium paid for growth stocks(over value) was even higher in Europe than it was in the US. And it still is.

In fact, it is as high as it’s been in a decade.

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And, surprisingly, throughout this episode over the past five years, there has not been a terribly significant multiple premium for US growth names over European growth names at any point in time.

Which means that European value stocks are the proverbial baby that’s been thrown out with the bathwater, even when compared to US value stocks.

Everything else being equal, European value stocks are trading at a significant multiple discount to US value, and this was not always the case.

Things that (still) make you go hmmm.

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