How Often Does the S&P 500 Underperform Cash in a Year?
The S&P 500, a benchmark index tracking approximately 500 large U.S. companies, is often viewed as a proxy for the broader stock market’s performance. Investors frequently compare its returns to “cash,” typically represented by short-term, low-risk investments like 3-month Treasury bills (T-bills), to assess whether equities justify their higher risk.
This article explores how often the S&P 500 underperforms cash on an annual basis, using historical data from 1928 until today, and provides a comprehensive analysis for investors seeking to understand market dynamics.
Defining Underperformance
For this analysis, “underperforming cash” is defined as the S&P 500’s annual total return—including both price appreciation and reinvested dividends—being lower than the annual return from 3-month Treasury bills.
T-bills are considered a risk-free rate because the U.S. government backs them and have minimal default risk. Their returns are typically quoted as annualized rates, making them directly comparable to the S&P 500’s annual performance.
Data and Methodology
The historical data for this study spans from 1928 until today, sourced from Aswath Damodaran’s NYU Stern historical returns page. This dataset includes annual total returns for the S&P 500 and average annual 3-month T-bill rates. The T-bill rates used are the average rates during each year, replacing end-of-period rates for better accuracy in measuring what investors would have earned.
To identify underperformance, we compared the S&P 500’s total return to the T-bill rate for each year. If the S&P 500 return was less than the T-bill rate, it was counted as a year of underperformance. This approach ensures a consistent and fair comparison over the long term.
Results: Frequency of Underperformance
Over the 97-year period from 1928 to 2024, the S&P 500 underperformed 3-month Treasury bills in 19 years. This translates to approximately 19.59% of the time (19 ÷ 97 ≈ 0.1959, or 19.59%).
Below is a table listing the years of underperformance, along with the corresponding returns for both the S&P 500 and T-bills:
| Year | S&P 500 Return | 3-month T-bill Return |
|---|---|---|
| 1931 | -43.84% | 2.31% |
| 1932 | -8.64% | 1.07% |
| 1937 | -35.34% | 0.28% |
| 1941 | -12.77% | 0.13% |
| 1953 | -1.21% | 1.89% |
| 1957 | -10.46% | 3.22% |
| 1962 | -8.81% | 2.77% |
| 1966 | -9.97% | 4.86% |
| 1969 | -8.24% | 6.67% |
| 1973 | -14.31% | 7.04% |
| 1974 | -25.90% | 7.85% |
| 1977 | -6.98% | 5.26% |
| 1981 | -4.70% | 14.04% |
| 1990 | -3.06% | 7.50% |
| 2000 | -9.03% | 5.82% |
| 2001 | -11.85% | 3.40% |
| 2002 | -21.97% | 1.61% |
| 2008 | -36.55% | 1.37% |
| 2018 | -4.23% | 1.94% |
This table highlights significant underperformance years, such as 1931 (-43.84% vs. 2.31%) during the Great Depression, 1974 (-25.90% vs. 7.85%) during the stagflation period, and 2008 (-36.55% vs. 1.37%) during the global financial crisis. These periods often coincide with economic recessions, bear markets, or high inflation, which can erode stock returns while T-bill rates remain relatively stable or even attractive.
Patterns and Observations
The underperformance years are not randomly distributed but tend to cluster during challenging economic periods. For example:
- The early 1930s saw multiple years of underperformance (1931, 1932) during the Great Depression.
- The 1970s, marked by stagflation, included underperformance in 1973, 1974, and 1977.
- The early 2000s, following the dot-com bubble burst, saw underperformance in 2000, 2001, and 2002.
- The 2008 financial crisis was another notable year of significant underperformance.
This clustering suggests that underperformance is more likely during systemic economic stress, when risk aversion drives investors toward safer assets like T-bills, which can offer positive returns even as stocks decline.
Magnitude of Underperformance
The degree of underperformance varies widely. In extreme cases, such as 1931 and 2008, the S&P 500 lost over 35%, while T-bills provided positive returns of 2.31% and 1.37%, respectively.
In contrast, years like 1953 saw a milder underperformance, with the S&P 500 down 1.21% compared to T-bills at 1.89%. On average, when underperformance occurs, the gap is significant, reflecting the volatility of equities compared to the stability of T-bills.
Long-Term Context
While the S&P 500 underperforms cash about 20% of the time annually, its long-term performance justifies its risk for many investors.
Historical data suggests the S&P 500’s average annual total return is approximately 10%, compared to 3-4% for 3-month T-bills over the same period. This difference, known as the equity risk premium, compensates investors for the higher volatility and potential for loss in stocks.
Despite occasional underperformance, the S&P 500 has consistently outperformed T-bills over multi-decade horizons, making it a cornerstone of long-term investment strategies.
Limitations and Considerations
This analysis is based on historical data, and past performance is not a guarantee of future results. The frequency and magnitude of underperformance may vary in different economic environments, especially given changes in monetary policy, inflation, and global economic conditions.
For example, in recent years (e.g., 2015, 2018), T-bill rates have been low due to accommodative Federal Reserve policies, affecting the comparison.
Conclusion
The S&P 500 underperforms cash (3-month Treasury bills) approximately 19.59% of the time on an annual basis, based on data from 1928 until today. This means that in about one out of every five years, holding cash would have been a better investment than the stock market.
However, over the long term, the S&P 500 has delivered significantly higher returns, reflecting the equity risk premium.