What real return do we need to get back to the peak of two years ago?
Posted on November 10, 2023

For much of 2023 it’s felt like we are climbing back from the market decline in 2022. We’ve fallen back a bit from August and can measure how far we are from what I judge as the market peak on November 8, 2021 –  exactly two years ago. When we look at inflation-adjusted numbers, we are down -20% from that peak for US stocks. We therefore need +25% real return from here to get back and leave that prior peak in the dust. That’s a lot. We may have a long wait.

Details:

In a prior post I showed the average time it took to recover from a major decline like we had in 2022 has been seven years. The shortest recovery was two years, and the longest was 14 years.

I prepared that chart before 2022 was complete: the real return for 2022 was -23.1%. It ranked as the sixth worst year since 1926 .

For the math to calculate how much we need to improve from here, I use the Dow Jones U.S. Total Market Index (Ticker DWCF). This index measures the value of all stock based on the change in price and accounting for dividends invested. The S&P 500 index that most of us follow is an index based on the change in price only. My US stock index fund, FSKAX, tries to match DWCF.

The numbers below show that after two years we are nominally 11% below the peak two years ago. We’ve had 11% inflation since then. The math that combines those two shows we are now 20% below that peak when I adjust for inflation. To make up that 20% decline, we need 25% real gain from here to get back to the November 2021 peak. That’s a big climb.

Conclusion. We likely feel a bit better about our portfolios than we did last year at this time. We’ve climbed. But when we adjust the numbers for inflation, we’re still down 20% from the peak value for US stocks two years ago. That means we need 25% real gain to get back and then surpass that peak. We have a lot more to climb.