Thursday, August 28, 2014

S&P 500 Triples in 5 Years!

It was a little over five years ago that the S&P 500 index hit the intraday low of 666. A few days ago it reached 2000. That means the stock market tripled in 5 years! After two crashes in the last 15 years I don't blame the average person for not noticing. But sooner or later, the public will recalibrate their thinking of the stock market and the economy. Maybe this expansion is here to stay and we are in the middle or early stages of a secular bull market.

I am no economist and I know my opinion and even the opinion of experts are only vague guesses at what the future holds. But I must pay attention to the overall market and economy as it is one of many factors in my investing decision process. I remember five years ago at the depths of the financial crisis, I told anyone who would listen that we are in a once-in-a-lifetime opportunity. Today I am very unsure where we are. But instinctively I feel that this bull market cannot last much longer. We have had probably the best five year bull market in history; if not then definitely one of the three best? Maybe?

Then again, I think I don't really know for sure and I should find out. So I decided to find out if my belief is reality. I don't know of a published source for this information so I decided to derive it myself based on Robert Shiller's market data. This is the data source for the Cyclically Adjusted PE (CAPE) by the recent Nobel prize winner. From the data, I used the S&P index going back to the late 1800s factoring in inflation and assuming that dividends are always reinvested. I feel factoring dividends and inflation is the best way to compare returns in different periods1. And I came up with the following table of the best 5 to 9 year real annualized returns with reinvested dividends. The results for each period must be non-overlapping.

5 Year Period Sept 1924 — Aug 1929 27.4%
Jul 1932 — Jun 193725.5%
Dec 1994 — Nov 199922.8%
Aug 1982 — Jul 198720.8%
Mar 2009 — Feb 201417.3%
6 Year Period Aug 1923 — July 192925.1%
Apr 1994 — Mar 2000 18.8%
Jul 1949 — Jun 1955 17.0%
Jul 1932 — Jun 193815.5%
7 Year Period Jan 1922 — Dec 192819.0%
Jun 1949 — May 1956 16.5%
Jul 1992 — Jun 1999 15.9%
Aug 1982 — Jul 198913.9%
8 Year Period Sept 1921 — Aug 1929 21.7%
Jan 1991 — Dec 1998 15.4%
Mar 1948 — Feb 1956 14.3%
9 Year Period Aug 1920 — Jul 1929 18.7%
Nov 1990 — Oct 1999 15.0%
Jul 1950 — Jun 1959 12.3%

The results are fascinating. The last five years only ranks 5th overall. The table gives a sense of perspective which is paramount in investing. But I am not using it to make any strong conclusions about the market over the coming years. But I can say that the current bull market can return 10% for the next two to three years and we still would not be breaking the record. The table shows that the best two 7 or 8 year periods have returned more than 15%!

The US economy appears to have room to expand based on unemployment and other economic results. The retail investor may suddenly see this and notice the market run up and forget the pain of the last fifteen years and finally jump in. To me, this scenario is as plausible as the stock market crashing, which is what most retail investors have been expecting for five years. I sure hope they get tired of waiting and dive in!

1. The S&P 500 index does not include dividends. To know the market index with dividends one should use the S&P 500 Total Return index.

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