{"id":120840,"date":"2022-01-26T14:25:24","date_gmt":"2022-01-26T19:25:24","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=120840"},"modified":"2022-11-21T09:51:12","modified_gmt":"2022-11-21T14:51:12","slug":"visualizing-historical-stock-market-probabilities","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/ibkr-quant-news\/visualizing-historical-stock-market-probabilities\/","title":{"rendered":"Visualizing Historical Stock Market Probabilities"},"content":{"rendered":"\n<h2 class=\"wp-block-heading\" id=\"h-introduction\">Introduction<\/h2>\n\n\n\n<p>Understanding market structure, historical outcomes, and a changing investing landscape can help more investors get the odds of investing success in their favor.<\/p>\n\n\n\n<p>In this week\u2019s newsletter, Drawing Capital utilizes a data-informed approach to assess and analyze equity index data across the past few decades for the NASDAQ 100 Index (index ticker: NDX), S&amp;P 500 Index (index ticker: SPX), Dow Jones Industrial Average (index ticker: INDU), and the Russell 2000 Index (index ticker: RTY).<\/p>\n\n\n\n<p>Obviously, while future performance can deviate from historical returns, understanding the historical return pro\ufb01le and distribution of event probabilities help to imagine investing possibilities and provide a historical context.<\/p>\n\n\n\n<p>A quick note: when this article refers to \u201cbuying the index\u201d, this is a theoretical proposition. In reality, it is typically not possible to actually \u201cbuy the index\u201d, and investors can seek to track the performance of an index through buying a high-quality index fund. Traits that help determine if an index fund is of high quality include:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Low tracking error relative to an underlying benchmark index<\/li><li>Low expense ratios and fees<\/li><li>High liquidity and volume<\/li><li>High reputation and quality of index fund provider<\/li><\/ul>\n\n\n\n<p>Since an index itself cannot be bought, here\u2019s a sample list of ETFs that track the 4 indices mentioned below:<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"602\" height=\"162\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-1.jpg\" alt=\"\" class=\"wp-image-120856 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-1.jpg 602w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-1-300x81.jpg 300w\" data-sizes=\"(max-width: 602px) 100vw, 602px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 602px; aspect-ratio: 602\/162;\" \/><\/figure>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"587\" height=\"347\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-2.png\" alt=\"\" class=\"wp-image-120857 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-2.png 587w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-2-300x177.png 300w\" data-sizes=\"(max-width: 587px) 100vw, 587px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 587px; aspect-ratio: 587\/347;\" \/><\/figure>\n\n\n\n<p>Key Insights:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The clustering of returns from 1995-1999, followed by 2000-2002, demonstrates the signi\ufb01cance of the bubble in telecom, technology, and internet stocks, followed by the bursting of the dot-com bubble.<\/li><li>Aside from a near 1% loss in 2018, the NASDAQ 100 Index has generated strong returns since 2009.<\/li><li>Despite the coronavirus crisis and resulting economic catastrophe, the NASDAQ 100 Index enjoyed strong positive performance in 2020, highlighting the strong demand in innovation-focused themes, such as e-commerce, work-from-home bene\ufb01ciaries, software companies that focus on digital transformation, \ufb01ntech, biotech, and more.<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"592\" height=\"351\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-3.jpg\" alt=\"Visualizing Historical Stock Market Probabilities\" class=\"wp-image-120858 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-3.jpg 592w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-3-300x178.jpg 300w\" data-sizes=\"(max-width: 592px) 100vw, 592px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 592px; aspect-ratio: 592\/351;\" \/><\/figure>\n\n\n\n<p>Key Insights:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>From 1988-2020, S&amp;P 500 Index performance was positive for the majority of calendar years.<\/li><li>From 1988-2020, the 2008 calendar year was the worst calendar year performance for the S&amp;P 500 Index.<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"589\" height=\"346\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-4.jpg\" alt=\"\" class=\"wp-image-120859 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-4.jpg 589w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-4-300x176.jpg 300w\" data-sizes=\"(max-width: 589px) 100vw, 589px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 589px; aspect-ratio: 589\/346;\" \/><\/figure>\n\n\n\n<p>Key Insights:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>It is common to see positive double-digit percentage returns in a calendar year for the Russell 2000.<\/li><li>In 2008, the Russell 2000 experienced a smaller calendar year loss compared to the NASDAQ 100 and S&amp;P 500.<\/li><\/ul>\n\n\n\n<p>Overall, it is clear that small companies and tech-focused companies provide some of the best growth stories, which help drive the historical positive performance of the NASDAQ 100 and Russell 2000 indices.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"591\" height=\"351\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-5.jpg\" alt=\"Visualizing Historical Stock Market Probabilities\" class=\"wp-image-120861 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-5.jpg 591w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-5-300x178.jpg 300w\" data-sizes=\"(max-width: 591px) 100vw, 591px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 591px; aspect-ratio: 591\/351;\" \/><\/figure>\n\n\n\n<p>Interestingly, despite the popular perception that small-cap companies are riskier than large-cap companies, this chart showcases that between 1988-2020, the Russell 2000 Index actually experienced a higher high-point and a better low-point compared to the S&amp;P 500 Index in terms of calendar year returns.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"594\" height=\"351\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-6.jpg\" alt=\"Visualizing Historical Stock Market Probabilities\" class=\"wp-image-120863 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-6.jpg 594w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-6-300x177.jpg 300w\" data-sizes=\"(max-width: 594px) 100vw, 594px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 594px; aspect-ratio: 594\/351;\" \/><\/figure>\n\n\n\n<p>Compared to the three other indices in the measured time range, the NASDAQ 100 Index historically has fewer calendar years of negative performance, and many of the negative performing years for the NASDAQ 100 Index were clustered around the bursting of the tech bubble in the years 2000-2002.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"assessing-probabilities-and-historical-occurrences-of-positive-performance-events\">Assessing Probabilities and Historical Occurrences of Positive Performance Events<\/h2>\n\n\n\n<p>The \u201chistorical occurrences and return outcomes\u201d in the following charts below demonstrate that longer holding periods are typically associated with better investment returns for these indices.<\/p>\n\n\n\n<p>The phrase, \u201cblindly buying\u201d, refers to an investor randomly \u201cbuying\u201d an index on any trading day at its closing price. In addition, by incorporating the \u201cblindly buying\u201d component to the analysis, it somewhat removes the timing element of buying and selling index funds, which supports a known phrase in the investment community: \u201ctime in the market is often more important than timing the market\u201d.<\/p>\n\n\n\n<figure class=\"wp-block-image img-twothird\"><img decoding=\"async\" width=\"600\" height=\"305\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-7.jpg\" alt=\"\" class=\"wp-image-120866 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-7.jpg 600w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-7-300x153.jpg 300w\" data-sizes=\"(max-width: 600px) 100vw, 600px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 600px; aspect-ratio: 600\/305;\" \/><\/figure>\n\n\n\n<p>Key takeaway: Buying the NASDAQ 100 Index at the closing price of any trading day between 1988-2019 and holding this investment for <strong>1 year would have produced a positive return about 84% of the time<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image img-twothird\"><img decoding=\"async\" width=\"594\" height=\"293\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-8.jpg\" alt=\"\" class=\"wp-image-120867 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-8.jpg 594w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-8-300x148.jpg 300w\" data-sizes=\"(max-width: 594px) 100vw, 594px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 594px; aspect-ratio: 594\/293;\" \/><\/figure>\n\n\n\n<p>Key takeaway: Buying the NASDAQ 100 Index at the closing price of any trading day between 1988-2011 and holding this investment for <strong>10 years would have at least doubled the investment\u2019s value about 79% of the time<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image img-twothird\"><img decoding=\"async\" width=\"609\" height=\"312\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-9.jpg\" alt=\"\" class=\"wp-image-120868 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-9.jpg 609w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/01\/drawing-capital-visualizing-historical-stock-probabilities-9-300x154.jpg 300w\" data-sizes=\"(max-width: 609px) 100vw, 609px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 609px; aspect-ratio: 609\/312;\" \/><\/figure>\n\n\n\n<p>Key takeaways:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Buying the S&amp;P 500 Index at the closing price of any trading day between 1988-2019 and holding this investment for 1 year would have produced a positive return about 80% of the time.<\/li><li>Staying invested in the long term leads to a high probability of generating positive returns. As seen in the above chart, buying the S&amp;P 500 Index at the closing price of any trading day between 1988-2011 and holding this investment for 10 years would have produced a positive return about 89% of the time.<\/li><li>It is typically easier to compound returns over long time periods compared to very short durations. Positive compounding of returns is advantageous to investors. As seen in the above chart, buying the S&amp;P 500 Index at the closing price of any trading day between 1988-2011 and holding this investment for 10 years would have produced a greater than 50% cumulative return about 79% of the time.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"concluding-thoughts\">Concluding Thoughts<\/h2>\n\n\n\n<p>Many very successful long-term investors care deeply about 2 traits: avoidance of permanent long-term capital loss (i.e. avoid losing money) and \ufb01nding businesses that compound at high and growing rates of return.<\/p>\n\n\n\n<p>While short-term investors are typically price-sensitive (and therefore are often focused on price multiples and current sentiment), long-term investors desire growing cash \ufb02ows from a business over time, which thereby increases a company\u2019s intrinsic value and stock price.<\/p>\n\n\n\n<p>By evaluating the historical data for the NASDAQ 100 Index (index ticker: NDX), S&amp;P 500 Index (index ticker: SPX), Dow Jones Industrial Average (index ticker: INDU), and the Russell 2000 Index (index ticker: RTY), it is clear that a longer holding period for index funds tracking these indices on average reduces the probability of permanent capital loss and simultaneously provides the opportunity to grow an investment\u2019s value over time.<\/p>\n\n\n\n<p>Notably, understanding market structure, historical outcomes, and a changing investing landscape can help more investors get the odds of investing success in their favor.<\/p>\n\n\n\n<p><em>To receive more insights and ideas delivered straight to your inbox every week for free, please subscribe to Drawing Capital\u2019s newsletter at <a href=\"https:\/\/drawingcapital.substack.com\">drawingcapital.substack.com<\/a>.<\/em><\/p>\n\n\n\n<p><em>This letter is not an offer to sell securities of any investment fund or a solicitation of offers to buy any such securities. An investment in any strategy, including the strategy described herein, involves a high degree of risk. Past performance of these strategies is not necessarily indicative of future results. There is the possibility of loss and all investment involves risk including the loss of principal.<\/em><\/p>\n\n\n\n<p><em>Any projections, forecasts and estimates contained in this document are necessarily speculative in nature and are based upon certain assumptions. In addition, matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors, many of which are beyond Drawing Capital\u2019s control. No representations or warranties are made as to the accuracy of such forward-looking statements. It can be expected that some or all of such forward-looking assumptions will not materialize or will vary signi\ufb01cantly from actual results.<\/em><\/p>\n\n\n\n<p><em>Drawing Capital has no obligation to update, modify or amend this letter or to otherwise notify&nbsp;&nbsp; a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.<\/em><\/p>\n\n\n\n<p><em>This letter may not be reproduced in whole or in part without the express consent of Drawing Capital Group, LLC (\u201cDrawing Capital\u201d). The information in this letter was prepared by Drawing Capital and is believed by the Drawing Capital to be reliable and has been obtained from sources believed to be reliable. Drawing Capital makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this letter constitute the current judgment of Drawing Capital and are subject to change without notice.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Drawing Capital utilizes a data-informed approach to assess and analyze equity index data across the past few decades for the NASDAQ 100 Index (index ticker: NDX), S&#038;P 500 Index (index ticker: SPX), Dow Jones Industrial Average (index ticker: INDU), and the Russell 2000 Index (index ticker: RTY).<\/p>\n","protected":false},"author":751,"featured_media":120881,"comment_status":"closed","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[339,338,341,352,344],"tags":[4922,1006,10974,2536],"contributors-categories":[13735],"class_list":{"0":"post-120840","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-data-science","8":"category-ibkr-quant-news","9":"category-quant-development","10":"category-quant-north-america","11":"category-quant-regions","12":"tag-econometrics","13":"tag-fintech","14":"tag-historical-stock-market-probabilities","15":"tag-visualization","16":"contributors-categories-drawing-capital"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.5) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Visualizing Historical Stock Market Probabilities<\/title>\n<meta name=\"description\" content=\"Drawing Capital utilizes a data-informed approach to assess and analyze equity index data across the past few decades for the NASDAQ 100 Index (index...\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.interactivebrokers.com\/campus\/wp-json\/wp\/v2\/posts\/120840\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Visualizing Historical Stock Market Probabilities | IBKR Quant Blog\" \/>\n<meta property=\"og:description\" content=\"Drawing Capital utilizes a data-informed approach to assess and analyze equity index data across the past few decades for the NASDAQ 100 Index (index ticker: NDX), S&amp;P 500 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