There is a long SP500 monthly series on Shiller's website, which I used to compute the 10Y rolling returns (for the 10 years ending at the present) from 1880-12/2008. I did not attempt to factor in dividends (which were significant once upon a time…), and keep in mind it was hard to "hold the index" until Jack Bogle came along. Nevertheless…

The enclosed chart shows that rolling 10 year returns are negative now as they were for (approximately) 1974-82, 1932-47, 1914-24, 1890-98, and 1884-5. If you advance these dates by ten years and look again at the chart, you would be tempted to conclude that the subsequent 10 year returns were strong.

Also interesting to note an apparent pattern in the wait time between peaks in 10Y return:

1887-1906 (19Y)
1906-1929 (23Y)
1929-1959 (30Y)
1959-2000 (41Y)

The second wait is 4y longer than the first, 3rd 7y longer than 2nd, and 4th 11 yrs longer than 3rd. It is tempting (again) to compare the elongating waits between 10Y peaks with concurrent increasing life-expectancy:

This table compares waits with (midpoint) life expectancy (for white males, of course):

.                  inc wait   LE    inc LE

1887-1906 (19Y)              48

1906-1929 (23Y)  4y          50      2

1929-1959 (30Y)  7y          63     13

1959-2000 (41Y) 11y          71      8

This whole investigation was pursuant to an academic paper suggesting increased risk-aversion for people who lived through bad markets: Do Macroeconomic Experiences Affect Risk Taking? by Malmendier and Nagel. Eventually the risk aversion decreases again through (ahem) natural population replacement.

Phil McDonnell comments:

Although there are only five complete cycles, I note that each speculative cycle is increasing in amplitude as well as increasing in period.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008


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