The Crestmont Stock Market Matrix presents the returns from the stock market, using the S&P 500 Index, for all combinations of periods from 1900 to present. Each colored square and number in the field of the graph reflects a period driven by a starting year from the left axis and an ending year from the top axis. The number in the square is the compounded annual return across the period; the color of the square indicates the magnitude of return.
First, the Crestmont Stock Market Matrix should be viewed from a distance, much like a Magic Eye image which reveals its picture as you stare at the whole at once. The Crestmont Matrix reveals a heat map of returns that tells the story of calm blue average returns over the long-term–even as the long-term encompasses dramatic periods of a decade or longer along the horizon that reflect significant surges of well above-average returns punctuated by extended periods of stall resulting in well below-average returns.
Second, stock market returns are not random; they occur across extended periods driven by the trend in the price/earnings ratio (P/E). The numbers within the graph are presented in black and white. Black numbers reflect an increase in P/E over the period, while white numbers correspond to a decreasing P/E. Note that green periods generally reflect black numbers and red periods reflect white numbers.
Third, the Crestmont Matrix delivers complementary views of history to emphasize that the current period is not unique. Although the current era includes seemingly dramatic events and revolutionary technology, a walk down the right margin reveals that similar leaps in technology have occurred during almost every decade in the past century. Likewise, a walk across the economic measures on the bottom of the chart similarly reveals a common long-term trend that generally continues today. Neither the major events nor economic measures of today suggest that the current period and future decades will be different from the past. Stock market history repeats itself, with slightly different rhymes. The lessons of history are good indications for what is needed to be successful in the future.
Finally, the version of the Crestmont Matrix that presents real returns, excluding the effects of inflation, better reflects the purchasing power of returns from investments. Periods with high inflation overstate the value of returns. Conversely, breaking even in the stock market during a period of deflation can provide greater purchasing power than positive returns that don’t keep up with inflation.