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Soula Stefanopoulos

Soula Stefanopoulos

Soula, LNWM’s Content Manager and Writer, loves to ask questions. Among other things, she was an editor at the OECD in Paris and managing editor of Louis Rukeyser’s Wall Street.

Stocks: The 21st Century S&P

Financial and Business Planning


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We Americans are known for our relentless focus on the future. And that’s a good thing. But sometimes, it’s worth taking a look at the past for perspective. Consider the returns of the S&P 500, the large-stock index that’s a proxy for the U.S. equity market.

The chart below sums up the situation, so far this century:

Jan. 1, 2001 – Jan. 1, 2014

(S&P 500 Stock Index)

(Barclay’s Bond Index)*

Annualized total return



Cumulative total return



Inflation-adjusted ann. return



*Barclay’s U.S. Aggregate Bond Index is a proxy for the U.S taxable investment-grade bond market.

That’s right. So far in the 21st century, U.S. bonds have outperformed stocks, despite the dramatic reversal of fortune that occurred in 2013: stocks up 32%, bonds down 2%.

Specifically, the S&P 500 has returned 4.6% annualized during the past 13 years vs. a 5.3% annualized gain for investment-grade bonds.

What’s more, the 4.6% annualized return on stocks since 2001 dramatically lags their 8% average annualized return for the past 20 years.

Where Does this Leave Us Now?

For some perspective, I turned to LNWM’s Chief Investment Officer Bob Benson, who per usual had a chart handy to illustrate his point.

“So far, the 21st century has been one of playing catch-up when it comes to stocks. By the turn of the century, valuations had gotten way ahead of corporate earnings and cash flow growth. Stocks have underperformed since then because they’ve been coming down from prices that were frankly too high given their cash flows to investors.”

Take a look at the chart below. (Click on it to enlarge.) Heading into 2000, and even 2001, investors were willing to pay more than 25 times forward earnings, on average, for large U.S. stocks. Historically, the ratio of price-to-earnings (the “P/E”) for large equities has averaged 15. We did get down to a P/E of 15 right around 2007, but then the financial crisis took P/Es down again — to 10, on average.

2014.02.19--PE Ratio of Large-Cap Stocks

*P/E – Price-Earnings ratio based on forecasted 12-month earnings.
Large-cap U.S. stocks = Russell 1000 Stock Index. Source: Russell Indices.

Says Bob: “The good news is that even with the big run-up last year, stocks are now valued right around 15 times forward earnings, which is the historical average. So equities seem to be fairly valued right now – not too high, not too low, based on this metric.”

“Bonds, on the other hand, have the prospect of rising interest rates dogging them. So it’s quite possible that stocks will return to their historical outperformance of bonds before this decade is over.”

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