On this page is an S&P 500 Rule of 20 Calculator. It adds the S&P 500 Price to Earnings Ratio (PE Ratio) to the year-over-year change in inflation (as measured by CPI-U) to come up with a dimensionless value to compare to 20. The tool shows the historical Rule of 20 valuation for the S&P 500 back to 1872, plus the current, max, median, and average Rule of 20.

Historical Rule of 20 Calculator

What is the Rule of 20?

The Rule of 20 is a dimensionless number that adds the current 12-month trailing Price to Earnings Ratio to the annual change in an index of the annual consumer inflation rate. A reading below 20, while a market is trending lower, means that we could be near a bottom.

In the United States (and in this tool), the most common index used is the broad-based S&P 500, and CPI-U is used as a proxy for inflation.

The Rule of 20 is purportedly a rule from Peter Lynch – although I can't source the quote at the moment, Lynch supposedly mentioned 20 minus the inflation rate as a fair value for a company. In chapter 39 of Graham and Dodd's seminal Security Analysis, they mention:

"We would suggest that about 20 times average earnings is as high a price as can be paid in an investment purchase of a common stock."

... with no mention of inflation. Lynch's formulation attempts to factor the 'gravity' of interest rates into the fair value of a stock. And, as you can see, the measure has fluctuated quite a bit. However, it has returned to roughly the 20 level repeatedly.

Rule of 20 Formula

The rule of 20 formula is:

rule\ of\ 20=\frac{price}{earnings}+YoY\ inflation

Where:

• Price - the current trading price of a total market index
• Earnings - the earnings of a share of a company over 12 months
• YoY inflation - the percentage change in a country linked to the index. This is expressed as a whole number, or percentage multiplied by 100

Limitations on the Rule of 20

Limitations on the Rule of 20 tend to align with those on other Price to Earnings metrics – although adding an interest rate proxy to the mix with inflation does improve the measure slightly. As noted in the S&P 500 Price to Earnings ratio tool, earnings aren't necessarily the best measure of current company performance.

Additionally, recessions can temporarily depress earnings, sending the PE ratio up, although an index's price might already be declining. 2008-2009 is an excellent example of this effect, as aggregate earnings were barely positive over a 12-month period, sending the PE ratio of the S&P 500 well over 100 as the market bottomed in March of 2009.

Other Measures of Market Valuation

Here are some other automatically updating tools which track the valuation of major total market indices:

• S&P 500 Price to Peak Earnings
• S&P 500 Price to Earnings
• S&P 500 Price to Sales
• S&P 500 Profit Margin
• Buffett Indicator (the Market Cap to GDP indicator)
• Bogle Stock Market Valuation Model
• Tobin's Q Market Valuation Model
• Shiller PE – the Cyclically Adjusted PE Ratio

The NASDAQ returned 20.73% in 2021. Using a better calculation, which includes dividend reinvestment, the NASDAQ returned 22.17%.

The 2021 NASDAQ Return: Even in Tech You Should Reinvest

The above returns assumed you bought the NASDAQ index at the open on January 4th, 2021 and sold at close on December 31, 2021. That's the maximum span you could have invested in the NASDAQ while all-in the year 2021.

Prefer a "full year" of history? If you bought the closing price on December 31, 2020 and sold the closing price on December 31, 2021, your returns were 21.39% and 22.18%, respectively.

2021 NASDAQ Index Price Return

NASDAQ Reinvested Dividend Return in 2021

As I say annually, the exact timing doesn't matter that much. As the old joke goes, time in the market beats timing the market.

However, even investing in a tech-laden index like the NASDAQ, dividends matter. Even if you didn't reinvest the dividend checks you received, I highly doubt you discarded them - you have to account for the dividend performance in some way.

Source on the 2021 NASDAQ Return Calculations

The NASDAQ Index is owned and computed by NASDAQ Indexes. There you'll find the index level and total return data. Find NASDAQ total return data here or on investing.com.

See NASDAQ returns in other years:

• 2023 NASDAQ Return
• 2022 NASDAQ Return
• 2020 NASDAQ Return
• 2019 NASDAQ Return
• 2018 NASDAQ Return
• 2017 NASDAQ Return
• 2016 NASDAQ Return
• 2015 NASDAQ Return
• 2014 NASDAQ Return

Any NASDAQ predictions for 2021?

The Dow Jones Industrial Average returned 18.65% in 2021. Using a better calculation including dividend reinvestment, the Dow Jones returned 20.94%.

2021 Dow Jones Industrial Average Return: Reinvest Your Dividends

I ran the above calculation for an index purchase at open on January 4th, 2021 and sold at close on December 31, 2021. This is the result if you did all of your investing in the maximum possible span inside 2021.

Alternatively, you might use a one-year holding proxy, where you instead bought the closing index price on December 31, 2020. If you used that date instead and still sold December 31, 2021 your returns would be 18.73% and 20.95%, respectively.

Dow Jones 2021 Index Returns

Dow Jones 2021 Total Return Index Returns

While the exact date doesn't really matter, dividends matter. With the larger, more mature firms in the Dow Jones Industrial Average, ignoring dividend reinvestment would be ignoring around 2.3% of returns from those awesome dividend checks. And even if you didn't choose to reinvest them, unless you discarded or refused the checks you still need to account for the gains.

Investing in the Dow Jones Price-Weighted Stock Index

Most stock indices nowadays are market capitalization weighted, (see the 2021 S&P 500 Return). The Dow Jones Industrial Average is a price-weighted index.

Price-weighted indices derive their index value by taking the trading price of the underlying company shares times some "individual stock factor".

Price weighting is not a great indexing method. However, honestly, it tracks other large cap indexes "fairly" well. For the most part, indices weighted by market capitalization is the superior methodology to track a basket of stocks.

Source on the 2021 Dow Jones Industrial Average Return Calculations

All data is credit Dow Jones Indices, owned by S&P Dow Jones Indices. There they maintain the price index and the calculation to derive the dividend reinvested index.

Historically, here on DQYDJ we have gone pretty far with our content – both in investing, and with some Dow Jones specific posts and tools:

• Dow Jones Industrial Average Dividend Reinvestment Calculator
  Estimate Dow Jones performance and returns back to 1896
• Dow Jones Industrial Average Historical Return Calculator
  Summary statistics on the Dow Jones over periods you choose.

See DJIA returns in other years:

• 2023 Dow Jones Industrial Average Return
• 2022 Dow Jones Industrial Average Return
• 2021 Dow Jones Industrial Average Return
• 2020 Dow Jones Industrial Average Return
• 2019 Dow Jones Industrial Average Return
• 2018 Dow Jones Industrial Average Return
• 2017 Dow Jones Industrial Average Return
• 2016 Dow Jones Industrial Average Return
• 2015 Dow Jones Industrial Average Return
• 2014 Dow Jones Industrial Average Return

How do you see the Dow Jones Industrial Average performing in 2021?

The S&P 500 Price index returned 26.61% in 2021. Using a better calculation which includes dividend reinvestment, the S&P 500 returned 28.41%.

Maximizing 2021 S&P 500 Return: Buy It, Hold It, and Reinvest It

There are two ways to compute an annual return, and the numbers I just quoted you assume you did all your investing in a single year. Specifically, the above returns assume you bought the market open on January 4, 2021, and sold at the exact close on December 31, 2021.

If you alternatively meant a "one-year span", those two returns, respectively, are 26.893% and 28.705%. This assumes, instead, that you bought the December 31, 2020 close.

S&P 500 Index Price Calculation

S&P 500 Total Return Price Calculation

Dividends Matter

Annually, I talk about how the exact date you pick doesn't much matter... as long as you keep your timeframes consistent. However, you do need to mind those dividends!

Even with a pandemic raging in the background and all sorts of geopolitical worries, companies continued to pay dividends consistently. Even if you didn't reinvest your dividends, unless you burned your dividend checks or otherwise discarded your proceeds, you do need to account for that extra gain.

Source on the 2021 S&P 500 Return Calculations

S&P Dow Jones Indices owns the S&P 500 Index and the total return index. They only added the total return index in 1987; before then, you have to construct your own index proxy to see how the index has fared.

We have a collection of investing calculators and tools – most including provisions for dividend, coupon, or interest reinvestment. Here are some which highlight the S&P 500:

• S&P 500 Dividend Reinvestment Calculator
  Dividend reinvestment calculations on the S&P 500 back as far as we can cover them – 1871, as of now
• S&P 500 Periodic Reinvestment and Dividend Calculator
  A tool which additionally tries to estimate fees and taxes. Allows periodic scheduled additions to investments.
• S&P 500 Historical Return Calculator
  See the average, median, best, and worst returns on the S&P 500 over a time period.

The 2021 S&P 500 Return

You can find the S&P 500 and Total Return index at Yahoo!. Here's a graph showing the delta in 2021:

All you had to do to pick up an extra 1.802 percentage points of return? Reinvest your dividends.Yes, it's not exact due to the timing of your payments and purchases, slippage if you had actually made the order instead of only in theory, taxes, and the like. However - it was a very real amount.

Other years:

• 2023 S&P 500 Return
• 2022 S&P 500 Return
• 2020 S&P 500 Return
• 2019 S&P 500 Return
• 2018 S&P 500 Return
• 2017 S&P 500 Return
• 2016 S&P 500 Return
• 2015 S&P 500 Return
• 2014 S&P 500 Return
• 2013 S&P 500 Return
• 2012 S&P 500 Return

On this page you'll find the S&P 500's peak earnings yield, including the maximum, minimum, average, and median of the measure from 1871 until today. Choose to either adjust for inflation (CPI), or use nominal peak earnings.

Additionally, find a visualization tool plus a table with the historical peak earnings yields. Export at any time to your own spreadsheet tool.

S&P 500 Peak Earnings Yield History Tool

Historical S&P 500 Peak Earnings Yield

Below is the monthly history of the S&P 500 Peak Earnings Yield.

Expect the most recent months to change – while recent months have price data, they don't necessarily have any earnings populated yet. I'll populate those as they become available – so do come back!