After 1901

After 1901, there was no pronounced immediate downtrend in real equity prices, but for the next decade, prices bounced around or just below the 1901 level and then fell.

By June 1920, the stock market had lost 67% of its June 1901 real value. The average real return (including dividends) was 4.4% a year in the ten years following June 1901, 3.1% a year in the fifteen years following June 1901, and -0.2% a year in the twenty years following June 1901.

Another instance of a high price-earnings ratio, 32.6, occurred in September 1929, the high point of the market in the 1920s and the second highest ratio of all time. The real S&P Composite Index did not return to its September 1929 value until December 1958. The average real return in the stock market (including dividends) was -13.1% a year for the five years following September 1929, -1.4% a year for the next ten years, -0.5% a year for the next fifteen years, and 0.4% a year for the next twenty years.

Yet another instance of a high price-earnings ratio occurred in January 1966, when the price-earnings ratio reached a local maximum of 24.1. Real stock prices would not be back up to the January 1966 level until May 1992. The average real return in the stock market (including dividends) was -2.6% a year for the five years following January 1966, -1.8% a year for the next ten years, -0.5% a year for the next fifteen years, and 1.9% a year for the next twenty years.

Most historical events, from wars through revolutions, do not have simple causes. When these events move in extreme directions, as price-earnings ratios have in the recent stock market, it is usually because of a confluence of factors, none of which is by itself large enough to explain these events.