What a Difference Five Years Makes – 10 Years Makes – 15 Years Makes
With this week marking the five-year anniversary of the stock market’s record high, much of the attention will and has been devoted to the market’s steep drop and sharp rebound. The chart below shows, the S&P 500 has been swinging in a wide range for the last 15 years. The pattern has been quite extreme – doubling and then falling by half over and over again.
Five years ago, the S&P 500 closed at a peak of 1,565.15. Since then the index has seen a huge decline followed by a huge rally. After all those swings, the S&P 500 has declined 7.9% over the last five years (annualized the decline works out to a loss of 1.63% per year). If we extend the period to the last 10 years, the S & P 500 has increased by 85.6% (6.38% per year).
SPX 5 & 10 Year Return Table
Some people may not remember, is that five years prior to the S&P 500’s all-time high made on October 9th, 2007, the index bottomed out from the 2000-2002 bear market at a level of 776.76. Following the post-Internet bubble low on 10/9/02, the index rallied more than a 100% before dropping more than 50% from 2007 to 2009. After bottoming out in March 2009, the index has since rallied more than 100% once again.
S&P 500 15 Year Performance Chart
With the S&P 500 about 7% away from its all-time high of 1565.15, I am skeptical the market is poised for another multi-year decline. The stronger earnings, higher dividends, reasonable valuations and an improving US economy are four main catalysts why I currently doubt the rally won’t fall off the edge of a cliff.
Conversely, I don’t expect double-digit returns in the coming years.
I believe that stocks may produce below historic average returns in the years ahead and in the near-term the market and associated economies face daunting challenges in the coming months. This includes – a sluggish global economy, European financial stress, U.S. budget battles and the looming fiscal cliff. However, with better fundamental drivers of value than at similar points in the past 15 years, stocks are likely to weather most potential outcomes better than they have in the past, making a return trip to the lows of the 15-year range unlikely, at least for now. Plus, if history is to repeat itself we are three years into the five-year cycle – but that is a very big “if”.
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