Has the S&P 500 Outperformed Its Historical Gains in the 21st Century? You Might Be Surprised

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The S&P 500 (^GSPC 5.54%) is a major stock market index, one that is often considered a benchmark for the broad market. It tracks the performance of about 500 large companies that trade on U.S. exchanges.

Many investors will simply adopt a strategy of investing their money in a mutual fund or exchange-traded fund that passively tracks the S&P 500 and hold that position for a long period of time, which has proven to generate strong returns. The index will give you exposure to a wide group of stocks that generally are resilient long term, given their size and scale.

However, with the market struggling this year and the S&P 500 firmly in a bear market, down more than 25%, I thought it might be a good idea to take a look at the more recent performance of the S&P 500 and see how the benchmark index has performed since the turn of the 21st century.

Image source: Getty Images.

Stacking it up

The S&P 500 was formally launched in 1957. Since then, the index has generated a compound annual growth rate (CAGR) of roughly 10.67%, including dividends. Adjusted for inflation, this number would be roughly 6.8%. Investing $1 in the S&P 500 in 1957 would yield more than $726 now.

If you look at the market starting in 2000 through the end of 2021, the S&P 500 generated a CAGR of just 7.51% including dividends, which falls to 5.08% when adjusted for inflation. Factoring in 2022 once it’s complete, the numbers will likely look worse given the struggles this year.

The 21st century has come with its fair share of challenges, including the dot-com bubble, Great Recession, and COVID-19 pandemic, all of which managed to wipe out an incredible amount of wealth. The S&P 500 lost nearly 52% of its value in the financial crisis between 2007 and 2009.

Now, of course, an argument can be made that those losses were more than offset by subsequent recoveries. Most recently, the S&P 500 exploded after the initial pandemic sell-off in March 2020, rising to new all-time highs before the end of that year. However, the S&P 500 has given back most of those gains in 2022.

The Federal Reserve has also been pumping money into the economy through quantitative easing since the Great Recession. With interest rates so low until recently, investors got more aggressive with stocks because other, safer investments simply weren’t generating any kind of meaningful yield.

Should you stick with the S&P 500 long term?

Clearly, the S&P 500 in the 21st century hasn’t managed to match its long-term historical performance. But with just over 20 years marked by multiple crises, the index’s returns so far in this century aren’t necessarily indicative of how its performance will look longer term.

Also, with a 7.5% annualized return this century, owning the S&P 500 would still have grown your money far more than just leaving it in a savings or money market account — and there has been some serious volatility along the way.

I do believe that over the long term, the S&P 500 will continue to be a great tool for growing your wealth, eventually erasing the losses of this current sell-off, as it has after every bear market in history.