As Close As It Gets

As Close As It Gets

November 30, 2021

Do these two sets of numbers mean anything to you? 71 and 4500 / 3.37 and 200. For many they can be a source of panic, uncertainty, or stress – driven by the financial media’s persistence to sell investors their emotions “du jour.” For me, it is a source of historical proof – proof in the long-term success of American businesses and the planning process for those retirees who have linked their lifestyle-sustaining income for multiple generations to receive.

Confused? Let me explain.In November of 1961 - when an average baby boomer was born and now getting closer to retirement at the age of 60 - the S & P 500 Index was 71. As I write, the index stands around 4500. This is the area where the average retiree/investor experiences the stress. Why? It. Is. The. Stock. Market. Some have gone as far as to compassionately refer to it as – say it with me – a casino.  And based on how the financial media comments on it daily, it is understandable as to why; for example, “what’s the trade for the day,” “how would you play this stock today,” “do you think we need to jump in now,” …and so on.

But wait, what are those other two numbers I mentioned in the opening sentence and how do they relate to the first set? Good question – let me explain. In November of 1961, the earnings (full year) of those same businesses that make up the S&P 500 were 3.37 and the consensus estimate for this year end is 200.

Let’s do a little math (promise it won’t be painful)– if the index went up from 71 to 4500, this is an increase of 64X. And if those same businesses, which make up the index, had their earnings go from 3.37 to 200 – that is an increase of 60X. Stop for a moment and reread that last sentence.

Investors have always asked why stocks go up – it is because their earnings go up. For those of you that have a difficult time grasping a sixty-year time frame – let’s view it over the average time a retiring couple will spend in retirement of thirty-years. In November of 1991, the Index went from 386 to 4500, an increase of 11x. The earnings went from 19.30 to 200, an increase of 10X. I can go on all day like this…

Not to pile on but since we are here – how about the growth of dividends provided to those same retirees/investors? In 1961 the dividends were 2.04 per share and now 60, a rise of 30x. This is compared to CPI (inflation) that went up 9X. In 1991 the dividends were 12.20 per share and now are 60, a rise of 5x. Compared to CPI that went up 2x.

What have we learned? Day-to-day markets move on emotions and speculation – but over the long-term, with history as our guide (which is the only thing we have) – the markets go where earnings go. Yes, sometimes markets get ahead of the other temporarily, but it is as close as it gets – when viewed from a long-term planning process.


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S&P 500 Index and CPI Source: The S&P at your fingertips – Political Calculations

S&P 500 Earnings and Dividend Source: S&P 500 earnings and dividend history –