The investor’s portfolio of common stocks will represent a small cross-section of that immense and formidable institution known as the stock market. Prudence suggests that he have an adequate idea of stock-market history, in terms particularly of the major fluctuations in its price level and of the varying relationships between stock prices as a whole and their earnings and dividends. With this background he may be in a position to form some worthwhile
judgment of the attractiveness or dangers of the level of the market as it presents itself at different times. By a coincidence, useful statistical data on prices, earnings, and dividends go back just 100 years, to 1871. (The material is not nearly as full or dependable in the first half-period as in the second, but it will serve.) The first is to show the general manner in which stocks have made their underlying advance through the many cycles of the past century. The second is to view the picture in terms of successive ten-year averages, not only of stock prices but of earnings and dividends as well, to bring out the varying
relationship between the three important factors. With this wealth of material as a background we shall pass to a consideration of the level of stock prices at the beginning of 1972.
The long-term history of the stock market is summarized in two tables and a chart. Table 3-1 sets forth the low and high points of nineteen bear- and bull-market cycles in the past 100 years. We have used two indexes here. The first represents a combination of an early study by the Cowles Commission going back to 1870, which has been spliced on to and continued to date in the well
known Standard & Poor’s composite index of 500 stocks. The second is the even more celebrated Dow Jones Industrial Average (the DJIA, or “the Dow”), which dates back to 1897; it contains 30 companies, of which one is American Telephone & Telegraph and the other 29 are large industrial enterprises.
Chart I, presented by courtesy of Standard & Poor’s, depicts the market fluctuations of its 425-industrial-stock index from 1900 through 1970. (A corresponding chart available for the DJIA will look very much the same.) The reader will note three quite distinct patterns, each covering about a third of the 70 years. The first runs from 1900 to 1924, and shows for the most part a series of rather similar market cycles lasting from three to five years. The annual
advance in this period averaged just about 3%. We move on to the “New Era” bull market, culminating in 1929, with its terrible aftermath of collapse, followed by quite irregular fluctuations until 1949. Comparing the average level of 1949 with that of 1924, we find the annual rate of advance to be a mere 11.2%; hence the close of our second period found the public with no enthusiasm at all for
common stocks. By the rule of opposites the time was ripe for the beginning of the greatest bull market in our history, presented in the last third of our chart. This phenomenon may have reached its culmination in December 1968 at 118 for Standard & Poor’s 425 industrials (and 108 for its 500-stock composite). As Table 3-1 shows, there were fairly important setbacks between 1949 and 1968
(especially in 1956–57 and 1961–62), but the recoveries therefrom were so rapid that they had to be denominated (in the long-accepted semantics) as recessions in a single bull market, rather than as separate market cycles. Between the low level of 162 for “the Dow” in mid-1949 and the high of 995 in early 1966, the
advance had been more than sixfold in 17 years—which is at the average compounded rate of 11% per year, not counting dividends of, say, 31 ⁄ 2% per annum. (The advance for the Standard & Poor’s composite index was somewhat greater than that of the DJIA—actually from 14 to 96.)
These 14% and better returns were documented in 1963, and later, in a much publicized study. It created a natural satisfaction on Wall Street with such fine achievements, and a quite illogical and dangerous conviction that equally marvelous results could be expected for common stocks in the future. Few people seem to have been bothered by the thought that the very extent of the rise might indicate that it had been overdone. The subsequent decline from the 1968 high to the 1970 low was 36% for the Standard & Poor’s composite (and 37% for the DJIA), the largest since the 44% suffered in 1939–1942, which had reflected the perils and uncertainties after Pearl Harbor. In the dramatic manner so characteristic of Wall Street, the low level of May 1970 was followed by a massive and speedy recovery of both averages, and the establishment of a new
all-time high for the Standard & Poor’s industrials in early 1972.
The annual rate of price advance between 1949 and 1970 works out at about 9% for the S & P composite (or the industrial index), using the average figures for both years. That rate of climb was, of course, much greater than for any similar period before 1950. (But in the last decade the rate of advance was much lower—51 ⁄ 4% for the S & P composite index and only the once familiar 3% for the DJIA.)
The record of price movements should be supplemented by corresponding figures for earnings and dividends, in order to provide an overall view of what has happened to our share economy over the ten decades. It is a good deal to expect from the reader that he study all these figures with care, but for some we hope they will be interesting and instructive.
The full decade figures smooth out the year-to-year fluctuations and leave a general picture of persistent growth. Only two of the nine decades after the
first show a decrease in earnings and average prices (in 1891–1900 and 1931–1940), and no decade after 1900 shows a decrease in average dividends. But the rates of growth in all three categories are quite variable. In general the performance since World War II has been superior to that of earlier decades, but the advance in the 1960s was less pronounced than that of the 1950s. Today’s investor cannot tell from this record what percentage gain in earnings dividends and prices he may expect in the next ten years, but it does supply all the encouragement he needs for a consistent policy of common-stock investment.
However, a point should be made here that is not disclosed in our table. The year 1970 was marked by a definite deterioration in the overall earnings posture of our corporations. The rate of profit on invested capital fell to the lowest percentage since the World War years. Equally striking is the fact that a considerable number of companies reported net losses for the year; many became “financially troubled,” and for the first time in three decades there were
quite a few important bankruptcy proceedings. These facts as much as any others have prompted the statement made above that the great boom era may have come to an end in 1969–1970. A striking feature of Table 3-2 is the change in the price/earnings ratios since World War II.† In June 1949 the S&P composite
index sold at only 6.3 times the applicable earnings of the past 12 months; in March 1961 the ratio was 22.9 times. Similarly, the dividend yield on the S & P index had fallen from over 7% in 1949 to only 3.0% in 1961, a contrast heightened by the fact that interest rates on high-grade bonds had meanwhile risen from 2.60% to 4.50%. This is certainly the most remarkable turnabout in the public’s attitude in all stock-market history.
To people of long experience and innate caution the passage from one extreme to another carried a strong warning of trouble ahead. They could not help thinking apprehensively of the 1926–1929 bull market and its tragic aftermath. But these fears have not been confirmed by the event. True, the closing price of the DJIA in 1970 was the same as it was 61⁄2 years earlier, and the much heralded “Soaring Sixties” proved to be mainly a march up a series of high hills and then down again. But nothing has happened either to business or to stock prices that can compare with the bear market and depression of 1929–1932.
judgment of the attractiveness or dangers of the level of the market as it presents itself at different times. By a coincidence, useful statistical data on prices, earnings, and dividends go back just 100 years, to 1871. (The material is not nearly as full or dependable in the first half-period as in the second, but it will serve.) The first is to show the general manner in which stocks have made their underlying advance through the many cycles of the past century. The second is to view the picture in terms of successive ten-year averages, not only of stock prices but of earnings and dividends as well, to bring out the varying
relationship between the three important factors. With this wealth of material as a background we shall pass to a consideration of the level of stock prices at the beginning of 1972.
The long-term history of the stock market is summarized in two tables and a chart. Table 3-1 sets forth the low and high points of nineteen bear- and bull-market cycles in the past 100 years. We have used two indexes here. The first represents a combination of an early study by the Cowles Commission going back to 1870, which has been spliced on to and continued to date in the well
known Standard & Poor’s composite index of 500 stocks. The second is the even more celebrated Dow Jones Industrial Average (the DJIA, or “the Dow”), which dates back to 1897; it contains 30 companies, of which one is American Telephone & Telegraph and the other 29 are large industrial enterprises.
Chart I, presented by courtesy of Standard & Poor’s, depicts the market fluctuations of its 425-industrial-stock index from 1900 through 1970. (A corresponding chart available for the DJIA will look very much the same.) The reader will note three quite distinct patterns, each covering about a third of the 70 years. The first runs from 1900 to 1924, and shows for the most part a series of rather similar market cycles lasting from three to five years. The annual
advance in this period averaged just about 3%. We move on to the “New Era” bull market, culminating in 1929, with its terrible aftermath of collapse, followed by quite irregular fluctuations until 1949. Comparing the average level of 1949 with that of 1924, we find the annual rate of advance to be a mere 11.2%; hence the close of our second period found the public with no enthusiasm at all for
common stocks. By the rule of opposites the time was ripe for the beginning of the greatest bull market in our history, presented in the last third of our chart. This phenomenon may have reached its culmination in December 1968 at 118 for Standard & Poor’s 425 industrials (and 108 for its 500-stock composite). As Table 3-1 shows, there were fairly important setbacks between 1949 and 1968
(especially in 1956–57 and 1961–62), but the recoveries therefrom were so rapid that they had to be denominated (in the long-accepted semantics) as recessions in a single bull market, rather than as separate market cycles. Between the low level of 162 for “the Dow” in mid-1949 and the high of 995 in early 1966, the
advance had been more than sixfold in 17 years—which is at the average compounded rate of 11% per year, not counting dividends of, say, 31 ⁄ 2% per annum. (The advance for the Standard & Poor’s composite index was somewhat greater than that of the DJIA—actually from 14 to 96.)
These 14% and better returns were documented in 1963, and later, in a much publicized study. It created a natural satisfaction on Wall Street with such fine achievements, and a quite illogical and dangerous conviction that equally marvelous results could be expected for common stocks in the future. Few people seem to have been bothered by the thought that the very extent of the rise might indicate that it had been overdone. The subsequent decline from the 1968 high to the 1970 low was 36% for the Standard & Poor’s composite (and 37% for the DJIA), the largest since the 44% suffered in 1939–1942, which had reflected the perils and uncertainties after Pearl Harbor. In the dramatic manner so characteristic of Wall Street, the low level of May 1970 was followed by a massive and speedy recovery of both averages, and the establishment of a new
all-time high for the Standard & Poor’s industrials in early 1972.
The annual rate of price advance between 1949 and 1970 works out at about 9% for the S & P composite (or the industrial index), using the average figures for both years. That rate of climb was, of course, much greater than for any similar period before 1950. (But in the last decade the rate of advance was much lower—51 ⁄ 4% for the S & P composite index and only the once familiar 3% for the DJIA.)
The record of price movements should be supplemented by corresponding figures for earnings and dividends, in order to provide an overall view of what has happened to our share economy over the ten decades. It is a good deal to expect from the reader that he study all these figures with care, but for some we hope they will be interesting and instructive.
The full decade figures smooth out the year-to-year fluctuations and leave a general picture of persistent growth. Only two of the nine decades after the
first show a decrease in earnings and average prices (in 1891–1900 and 1931–1940), and no decade after 1900 shows a decrease in average dividends. But the rates of growth in all three categories are quite variable. In general the performance since World War II has been superior to that of earlier decades, but the advance in the 1960s was less pronounced than that of the 1950s. Today’s investor cannot tell from this record what percentage gain in earnings dividends and prices he may expect in the next ten years, but it does supply all the encouragement he needs for a consistent policy of common-stock investment.
However, a point should be made here that is not disclosed in our table. The year 1970 was marked by a definite deterioration in the overall earnings posture of our corporations. The rate of profit on invested capital fell to the lowest percentage since the World War years. Equally striking is the fact that a considerable number of companies reported net losses for the year; many became “financially troubled,” and for the first time in three decades there were
quite a few important bankruptcy proceedings. These facts as much as any others have prompted the statement made above that the great boom era may have come to an end in 1969–1970. A striking feature of Table 3-2 is the change in the price/earnings ratios since World War II.† In June 1949 the S&P composite
index sold at only 6.3 times the applicable earnings of the past 12 months; in March 1961 the ratio was 22.9 times. Similarly, the dividend yield on the S & P index had fallen from over 7% in 1949 to only 3.0% in 1961, a contrast heightened by the fact that interest rates on high-grade bonds had meanwhile risen from 2.60% to 4.50%. This is certainly the most remarkable turnabout in the public’s attitude in all stock-market history.
To people of long experience and innate caution the passage from one extreme to another carried a strong warning of trouble ahead. They could not help thinking apprehensively of the 1926–1929 bull market and its tragic aftermath. But these fears have not been confirmed by the event. True, the closing price of the DJIA in 1970 was the same as it was 61⁄2 years earlier, and the much heralded “Soaring Sixties” proved to be mainly a march up a series of high hills and then down again. But nothing has happened either to business or to stock prices that can compare with the bear market and depression of 1929–1932.
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