S&P 5000!

Hip hip! The S&P 500 notched one of its merrier milestones in memory Friday, closing above 5,000 for the first time. To this, we offer 5,000 huzzah!s … and a friendly reminder that milestones are meaningless.

Humans love round numbers. We can’t help it! The row of zeroes is aesthetically pleasing, and a higher number in front of those zeroes signals progress. But for stocks, index levels are trivial trivia. They reflect past performance, telling us where stocks have been. Past performance doesn’t predict future returns.

Then too, index levels are a poor way to measure progress. Every thousand-point increment in the S&P 500’s history may be equal in these linear terms. But in percentage terms—meaning, in terms of actual returns—each increment shrinks. The journey from 3,000 to 4,000 was a 33.3% price return. From 4,000 to 5,000? 25.0%. From here, it will take a 20.0% price return to get to 6,000. Reaching 7,000 will take a mere 16.7% after that. Behold, the magic of compounding.

Here is another way to see this. When 1925 began, marking the start of what we consider reliable data, the S&P 500 price index level was 10.35.^[i] Its pre-crash peak in September 1929 was a whopping 31.92.^[ii] A mere 21.57-point move in just under 5 years was sufficient to qualify as a big bubble because it was a more than 200% return. Then came the crash and brutal bear market, sinking the index level to 4.41 in July 1932.^[iii] That is a -27.52-point drop … and an -86.2% decline from the peak.

From there, the index began a long, jagged climb to its first 1,000-point milestone. When did that arrive? Drumroll, please … February 2, 1998!^[iv] It took over 70 years from what we would consider the index’s inception. It dipped below 1,000 again in each of the next two bear markets (2000 – 2002 and 2007 – 2009), then finally got over the 2,000 hump in August 2014, closing at 2,000.02 on August 26.^[v] So, over 70 years for the first 1,000 and just 16 and a half for the second. Which makes sense, considering that first 1,000 amounted to a 9,561.8% return from that 1925 opening level, while 2,000 was a mere 100% rise from the earlier milestone. The trip to 3,000, a 50% return, was even faster: The S&P 500 got there on July 23, 2019.^[vi] The first 4,000 came lightning-fast, on April 1, 2021 (no foolin’!), and now, one shallow bear market and recovery later, the great 5k.^[vii]

From here, those thousand-mile markers will probably come even faster, much as they did for the Dow—to the extent that few seem to remark on them anymore. There was no great fanfare when the Dow crossed 38,000, and we doubt there will be when 39,000 arrives. Perhaps 40,000 will have enough zeroes. Maybe it is really just about having a single digit in front of a string of zeroes. Who knows!

Either way, all it tells us is that stock returns compound over time, which is ancient news and the very reason people invest. It doesn’t tell us when 6,000 will arrive, when the next bear market will start or how much stocks will return between now and then. Heck, it doesn’t even tell us investors’ actual returns, because an index level is price-only returns. It excludes dividends, which both subtract from stock prices when they are paid out and contribute a big chunk of stocks’ total returns through reinvestment.

So, like we said, meaningless! Fun, but meaningless. Have a nice weekend.