In the previous post
I wondered: Is this a common breakdown? What about other periods of time? You may have seen charts showing the rolling historical 10-year total returns of the S&P 500. For example, 1980-1990, 1981-1991, 1982-1992, and so on. Here is such a chart:
There are only three components (excluding transaction costs and expenses) to the total return from the stock market: dividend yield, earnings growth, and change in the level of valuation (P/E ratio). To assess the potential returns from stocks for the next decade, this analysis presents the total return and its components for every ten-year period since 1900.
Observations. Despite my discovery that it
Since approximately the time of World War II, the overall profits of the S&P 500 companies have risen in every single 10-year period. Meanwhile, the dividend yield was also positive, although it has experienced a gradual decrease over time. If you just look at those two components added together, that is quite impressive.
Finally, we see that the component with the wildest swings by far is the Price/Earnings ratio. From this visualization, it looks like huge “waves of optimism” and “waves of pessimism” that are end up causing most of the overall volatility in total return. Right now, we appear to be still riding one the waves of optimism.
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