“What goes up, Must come down”
– Blood Sweat and Tears
In last month’s article, we focused on “Recognizing a Bear Market” as one of the great qualities to adopt for anyone who wants to become a great investor. This month, we contemplate the very long term cycles in investment markets.
This month we celebrate two very significant anniversaries.
The first anniversary is very important to our team here at Concentus. On February 19th we celebrated the 5 year anniversary of the formation of our firm. It is hard to believe it has already been 5 years since our team left “Big Wall Street” in order to form our independent private wealth advisory firm. We are very proud of the firm we have built, all thanks to the support of our wonderful group of client families. We THANK YOU for your ongoing trust and confidence, and we look forward to working together for many years.
The second anniversary will get much more national publicity and media attention. Exactly 10 years ago, on March 9, 2009, the ugliness of the 2008 bear market and economic recession finally ended, and a new Bull Market was born. On that day, the S&P 500 achieved its very lowest level of that crisis, and bottomed out for good at a closing level of 677, a price level that will probably go down in history as the single greatest buying opportunity any investor may see for several generations.
Since that day, the S&P 500 has risen relentlessly, has been positive almost every year, and is now trading at a level of roughly 2,750, which is over 4 times higher than it traded that day. On March 9th, this incredible Bull Market will celebrate it’s 10th birthday.
What Goes up, Must Come Down
As we have written about a great deal in the past, investor psychology can be kind of funny. Sometimes investors just can’t stand prosperity.
The going narrative among the financial media and popular culture can be adequately described by the old saying “what goes up, must come down”, and most people believe that this raging bull market cannot possibly continue. According to this outlook, a bull market which has raged on for 10 years, without being interrupted by a single bear market, is clearly poised for a fall, and it is only a matter of time until the next crash comes along. After such a long and powerful move up, the juice is pretty much squeezed out of the lemon, and although equities may have a little more upside, we are much closer to the 9th inning than we are to the 1st. We should expect much lower returns in the future.
Just for fun, turn on the TV and watch the financial news next week, and count how many times you see a headline announcing the 10th birthday of this Bull Market, with the implication that the party has already gone on too long, and the hangover is about to kick in.
Although it is not the point of this essay, we cannot resist pointing out the truth about the duration of the current Bull Market in equities before we move on. Much media fanfare has been made of the fact that the S&P 500 has experienced a 10 year Bull Market, without being interrupted once by a “Bear Market” decline of 20% or more. This is made out to be reason for great concern, as this now represents one of the longest Bull Markets in history. While this is technically true, it is also fact that the S&P declined by 19.4% in the summer of 2011, and declined by 19.8% in the 4th quarter of 2018. Although these 2 episodes do not technically fit the description of a bear market, commonly described as a 20% decline, they sure clawed like a bear from where we sit. But we digress….
An Alternative Narrative
What if there is another way of thinking about the behavior of the S&P 500 over the last 10 years, by using a longer term perspective?
Most investors with an adult memory can easily recall what occurred in the 10 years prior to March 9, 2009 which set the stage for that historic day. Over the prior decade, the US stock market went through not one, but two of the worst Bear Markets ever experienced in our nation’s history – back to back, all in the same decade.
Take a look at this long term chart of the S&P 500, and notice the “lost decade” in equities that began when the new millennium began in 2000:
Log Scale used
What if the bull market in stocks since 2009 was just really making up for lost time?
In August of the year 2000, the S&P 500 made a new all time high, and traded to a level of 1,517, before dropping by roughly 50% during the “Tech Wreck” crash of 2000-2003. Equities spent the next 4 years recovering, and briefly surpassed that high again (at 1,549) in October of 2007, before declining by 57% in the financial crisis of 2008. The S&P 500 didn’t see the 1,500 level again until February of 2013. In other words, from August of 2000, until February of 2013, a period of almost 13 years, equities in the US made exactly zero progress on a price basis.
We may also wish to examine the nature of the recovery in equity prices that has occurred since this terrible decade. As we suggested above, much has been made of the duration, and force of the Bull market in stocks over the last 10 years, as the S&P 500 has treated investors to a long Bull Market, and is over four times higher than it was in 2009. However, it may make sense to understand this 10 year Bull Market in 2 phases:
- The Recovery Phase, which is the period of time it took the S&P 500 just to get back to even. The S&P 500 reached a high of 1,549 in October of 2007 before crashing to a low of 676 in March of 2009. It then took until February of 2013 for stocks to retake the 1,500 level, and fully recover. So, the first 4 years and 129% of price appreciation of this famous bull market did nothing more than get stocks back to even.
- The Growth phase, which is the period of time that equities have actually been growing beyond their prior high. This represents the true “Bull Market” in stocks. In the 6 years since February 2013, stock prices have risen by roughly 77%. Yes, this has been an impressive return, but when we consider it took 19 years for stocks to rise this far above the high of the year 2000, the results are not quite as historic as the media and popular culture would suggest.
Reversion to the Mean
Much has been made in the media of the last 2 decades: there was the “Lost Decade” of 2000-2010, followed by the “Raging Bull” of 2009 – 2019. However, we here at Concentus prefer to think of the markets using an even longer view, and believe that secular cycles in asset prices play out over periods more like 30 years.
Most people understand the phenomenon in statistics known as “reversion to the mean”, which means that over very long periods of time, or large number of observations, most statistics end up gravitating to their long term averages. Phillies shortstop Jimmy Rollins had a career batting average of .264 over a 16 year career. Although he may have gone through long stretches of games during which he batted much better, or much worse than that, you could pretty much count on the fact that eventually his performance at the plate would gravitate back to this average.
Stocks work in a similar way. Despite short term volatility over a month, year, or 5 year period, over very long periods of time stock returns have generally gravitated to their long term average return of roughly 8% – 10% per year. In fact, the chart below shows the “Rolling 35 year returns” of the S&P 500, and measures the average annual return, from any daily starting point all the way back to 1926, achieved by the S&P 500 in the subsequent 35 year period of time. As the chart shows, over very long periods of time stock returns have spiked as high as 14%, or as low as 8%, but most 35 year period returns have clustered right around 10% or so.
So let’s have some fun with Math, and the data on this chart.
The very worst starting date in the history of the S&P 500 was September 1929, on the eve of the crash of 1929 and the great depression, which is widely known as the worst stock market crisis in history. Although “Black Thursday” of 1929 sparked off a stock market malaise of almost 20 years, the S&P 500 still turned in a respectable return over the subsequent 35 year period. If we stretch out our horizon to 35 years, we find that the S&P 500 returned an average annual return of 8.1% for the period September 1929 to September 1964.
As we explored above, March of the year 2000 was also a pretty terrible starting date for stocks, as it was the eve of the double-barrel stock market crashes of the “Lost Decade”. So how has this start impacted the prospects for the 35 year return an investor might achieve from 2000-2035?
Things are off to a fairly horrible start for this 35 year cycle. So far, the S&P 500 has turned in an average annual return of 4.9% per year for the 19 years from 2000-2019. Stocks are way behind the 8.1% pace set by even the Great Depression. In fact, in order to simply catch up to the great depression, and match the 8.1% return for equities between 1929 – 1964, the S&P 500 would have to earn a return of roughly 12% per year for the next 16 years.
Going back to 1926, the 35 year annual return on the S&P 500 has never fallen below 8%”
Of course, this is all just fun with numbers, and in no way a projection of the future. There is no cosmic rule that ordains that equity returns must exceed 8% over every 35 year period in history. However, given the chart above, the 4.9% average annual return that stocks have achieved so far since 2000 would clearly be an outlier, compared to every other 35 year period in modern history.
Despite the ranting and raving of the media to the contrary, is it possible that the Bull Market of the last 10 years has really be mostly just making up for lost ground? Is it possible that stocks really are just getting started?