Overall, the average stock market return is 10% annually in the U.S. but more realistically, 6% to 7% when accounting for inflation.
However, it’s rare that the stock market return is actually 10% in a given year. When looking at nearly 100 years of data, from 1926 to 2020, the yearly average stock market return only fell between 8% and 12% eight times. In reality, stock market returns were are typically much higher or much lower.
There is a silver lining to this constant stock market drama. If someone loses thousands in the stock market, there’s a good chance they’ll gain it back over time. That’s why many experts recommend holding onto investments when the market experiences a bad week, rather than selling stocks at a loss.
Sure, investing may be a long-term game. But what does that mean realistically? How much can investors expect to gain in an average year, or average decade?
Many people want to know how much they stand to gain or lose before retirement. The amount they gain or lose over time is known as the stock market return, and it’s an important factor for every investor in the stock market.
What Is a Stock Market Return?
To understand stock market returns, it helps to know why the stock market fluctuates. Looking at a single stock—let’s use an airline stock—as an example, then applying that knowledge to the stock market at large, may help investors understand the fluctuations.
A company share price may increase or decrease depending on various factors, such as supply vs. demand, market sentimentality, changes in revenue, and political issues, just to name a few.
Seemingly unconnected financial factors, like increasing trade tariffs between two nations, can impact the valuation of certain stocks in an interconnected economy. Since the stock market is volatile, it is at times influenced by emerging global events and sudden changes in the prices of goods that are available to US consumers and businesses.
Researchers, for instance, have argued that the announcement of retaliatory tariffs on steel and aluminum imported from China to the US led to a $1.7 trillion loss in market value for listed companies. Other economists have claimed that US-China tariffs cost the average American household $374 over the course of one year. And, when the WTO allowed US tariffs on European-made airplanes, airline stocks saw a decline.
Factors that Impact the Stock Market
Numerous factors, naturally, affect the value of stocks. The US airline industry relies, in part, on leisure travelers’ discretionary spending—consumers opting to pay for flights that they do not need to take. When trade wars lead to less available money in Americans consumers’ pockets (i.e., certain taxed imports suddenly costing more), the market can react out of fear of future declines in sales or concern for the increasing cost of doing business. This is called market sentimentality, which can negatively affect a stock’s value.
When the US increased duties on Chinese metal imports, China reacted by levying tariffs on US exports. The 2019 announcement of retaliatory tariffs by China on the US—impacting American-made goods like appliances, agriculture, construction equipment, textiles, and rubber—led to a one-day loss of $1 trillion in global stocks’ value.
As multiple companies’ share prices fluctuate simultaneously, the stock market as a whole can swing up or down. If a trade war affects various companies’ production overseas or consumer’s ability to spend domestically, numerous big businesses’ shares could drop, and the public becomes uncertain about the US economy. As a result, the market could dip. When tariffs on imports and exports ease, some stocks can rise—as traders anticipate reduced costs passed on to consumers and to businesses.
All this fluctuation affects how much money investors gain or lose in the market. When people wonder what their return will be, they’re asking how much they will have gained (or lost) in a year, or 10, 20, or 30 years. While everyone invests in different stocks and funds, a simple way to estimate how much they might gain is by looking at the average stock market return.
Measuring Growth in the Stock Market
How do people measure stock market returns? By looking at indexes. An index is a group of stocks that represents a section of the stock market, and there are roughly 5,000 indexes representing US stocks. Investors may be familiar with the three most popular market indexes: The Dow Jones Industrial Average, Nasdaq Composite, and S&P 500.
The S&P 500 index represents the 500 largest publicly traded companies, such as Microsoft, Apple, Amazon, Facebook, and Alphabet. It speaks for around 80% of the US stock market, so its performance is a good indicator of how the market is doing overall.
When people refer to the stock market and the average stock market return, they’re probably referring to the S&P 500.
The History of Average Stock Market Returns
People typically don’t invest in the stock market for just one year. It may be more helpful to look at the average stock market return over the last 10, 20, and 30 years.
The Average Market Return for the Last 5, 10, 20, and 30 Years
By looking at the S&P 500 we can start to get an idea of the average market returns dating back 5, 10, 20, and 30 years.
Average market return for the last 5 years
According to the S&P annual returns from 2016 to 2020, the average stock market return for the last five years was 13.57%.
Average market return for the last 10 years
Looking at the S&P 500 from 2011 to 2020, the average S&P 500 return for the last 10 years is 12.13%, which is a little over the annual average return of 10%.
The stock market had its ups and downs over the decade, but the only years that experienced losses were 2015 and 2018, and the losses weren’t major—0.73% and 6.24%, respectively.
Average market return for the last 20 years
Looking at the S&P 500 from 2001 to 2020, the average stock market return for the last 20 years is 6.92% 5.599%.
The United States experienced some unique and rough times from 2000 to 2009, resulting in some major lows and some notable highs.
In early 2000, the market was doing exceptionally well, but from late 2000 to 2002, the dot-com bust contributed to losses for three consecutive years. That period wasn’t helped from the aftermath of 9/11 in 2001.
In 2008, the financial crisis led to huge losses. Looking at these factors, it isn’t a huge surprise that the 20-year average stock market return is lower than the annual average.
Average market return for the last 30 years
When we add another decade to the mix, the average return inches closer to the annual average of 10%. Looking at the S&P 500 for the years 1991 to 2020 1990 to 2019, the average stock market return for the last 30 years is 9.87%.
Some of this success can be attributed to the dot-com boom in the late 1990s (before the bust), which resulted in high return rates for five consecutive years.
Outliers in Stock Market Returns
So, why is the annual average of 10% not a reliable indicator of stock market returns for a specific year? Because outliers can skew the annual average. The return is much higher or much lower than usual in certain years, and those years are known as outliers.
For example, the average stock market return for the last 20 years may seem low at 5.599%, especially when compared to return for the last 10 years, which was 11.805%. But not every year from 2000 to 2009 was bad for the stock market. In fact, in 2003, the average return was 26.38%, and it was 23.45% in 2009. But there were negative outliers that affected the 20-year average.
Returns from 2000 to 2009 are perfect examples of outliers in the stock market. The late 1990s were the years of the dot-com bubble, when technology and website-based companies became popular in the market. In 2000, companies like Cisco and Dell placed huge “sell” orders on their stocks, and investors started panic-selling their shares.
People may hear this period referred to as the dot-com bust, and the market experienced annual losses for three years. In 2000, the average annual loss was 10.14%; in 2001, returns dropped by 13.04%; in 2002, they plummeted by 23.37%.
Another example of an outlier is the financial crisis of 2008. For years, banks had given unconventional loans to people with low income and bad credit so they could buy houses. As more people bought homes, housing prices increased drastically. People could no longer afford houses, which put lenders in a tough spot.
The Fed proposed a bank bailout bill, but Congress denied the bill, in September of that year, resulting in a market crash. Congress passed the bill in October, but it couldn’t immediately undo the damage on the stock market. In 2008, the market return fell by a whopping 38.49%.
The dot-com bust and the financial crisis of 2008 are two prime examples of outliers that have caused stock returns to drop more than usual. But in years following these negative outliers, the stock market soared.
Panic from the dot-com bust and other tensions finally started to calm down in late 2003, and the market return was 26.38% for the year. Annual average returns continued to trend upward for four more years, until the crisis of 2008.
After the market crashed in 2008, it bounced back with a return of 23.45% in 2009 and continued to rise for six years. The first loss was in 2015, and that was only by 0.73%.
Sharp drops are often followed by sharp gains—and by consecutive annual gains, even if they aren’t huge. People who panicked and sold their stocks in 2008 once share prices started to drop likely lost a lot of money. But those who held onto their assets probably increased their earnings by 2012, when market returns had finally increased enough to offset how much the market lost in 2008.
When the stock market experiences a negative outlier, investors would be wise to consider keeping the long game in mind.
Future Stock Market Growth Predictions
As we can see from the outliers during the dot-com bust and financial crisis, when the stock market performs poorly, it will eventually bounce back. Similarly, if the stock market does exceptionally well, the market will eventually slow down and experience a loss.
The widely accepted rule is that if an investor’s rate of return is low now, they can expect it to be high in the future; if their rate of return is high now, they can expect it to be low in the future. Basically, the market balances out and experiences positive growth overall. Stock market returns increase around 70% of the time.
When share prices peak, then drop by 10% or more, that’s known as a stock market correction. It’s no coincidence that the word correction is used. Things have a way of balancing out. If the market is doing swimmingly, investors can bet the market will correct itself by dipping.
All investments have risk, so there’s no way to guarantee a certain stock market return before someone retires. And anyone who tells investors they can time the stock market to maximize returns is dead wrong.
Numerous factors affect stocks’ performance, so it can be difficult to predict how a stock will perform at any given time—especially for someone who isn’t fluent in the language of the stock market.
Choosing an Investment Style
Some investors might enjoy tracking the ups and downs of the stock market. They like to know what’s going on and be in control of their investments.
Others might feel overwhelmed by trying to make decisions when their stocks are at an all-time high or nosedive. They’d rather let a professional do the work for them so they can sleep well at night.
Every investor has a different style. With SoFi Invest®, members can choose between active and automated investing. Active investing is for people who like a hands-on approach. They can monitor their stocks and trade as they see fit.
Automated investing is for people who prefer a hands-off style. They can enter their goals into the SoFi Invest® app, and SoFi takes care of the rest—without charging management fees.
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