This article was originally published on TheStreet.com on March 6, 2014 at 12:27pm EST
Since we find ourselves at all-time highs, as measured by the Dow Jones Industrial Average and S&P500 Indices, it may be useful to take a step back and survey our situation. We’ve certainly come a long way since the dark days of March 2009, but are these sensational — and very much sensationalized – data points clouding your vision of what the future may hold?
Everyone knows the stock market has more than doubled over the past five years, that fact gets a lot of attention in the financial media. Depending on how that information is delivered, though, it can be seen as a harbinger that the only direction to go from here must be down. And quickly. But I’m not so sure….
Let’s take a step back to get a little clarity.
So the market has more than doubled over the past five years, got it. But what perspective can really be gleaned by measuring from the bottom? What if we measure from both previous troughs and peaks? Most notably, let’s look at how the market has fared since the previous two cycles — we had a peak in 2000, a trough in 2002; another peak in 2007, and the aforementioned trough in 2009. How much do you think the market has returned, annually, since its previous peak in 2007?
About 3% annually for both the Dow and S&P500.
Now let’s take a further step back and measure from the prior peak in 2000 for a trailing 14-year look.
The above chart reflects a 3.64% annual gain for the Dow and just 1.98% for the S&P500.
You might be thinking it’s not completely relevant to measure from a high-point to high-point, as these data points represent prices that are undeniably extended and therefore “unfair.” Is it more fair to measure from the other extreme? Here are the figures going back twelve years to the bottom in 2002:
On average, each year since the market trough of 2002 the Dow has returned 8.6% and the S&P500 has returned almost exactly 10%. Historically speaking, these are not particularly extraordinary numbers. In fact, they are pretty much right in line with average returns going back over 100 years.
So what is the point here?
The point is that you shouldn’t be shocked when the market hits an all-time high. Nor should you be shocked when your portfolio hits an all-time high. Generally speaking, the stock market goes up over time. The S&P500 is made up of companies whose job it is to stay in business and constantly invent new ways to maintain and increase their profitability, and their stock price. If they don’t make money and retain shareholder interest, they go out of business — this is not a goal of the companies’ executives or employees, and certainly not its owners (shareholders).
If you are investing well, you should be making money over time.
But the stock market crash that relented exactly five years ago today is still very fresh in most investors’ minds. The idea that one can make money investing in the stock market was all-but abandoned five years ago. It was just too scary…
Information means very little without context.
Take the sentence, “It got all the way down to 40 degrees last night!” for instance. I live in Los Angeles and it’s March, so that statement is not of particular note. If I tell you the market is up 100% the past five years, the fact that the rally in question was preceded by a 50% correction suddenly becomes quite relevant.
Market returns have been average—just average—since the bottom formed in 2002. And we are in the early to middle stages of an economic recovery. Earnings multiples and P/E ratios are completely within ‘normal’ ranges. I would argue that the caution flags you are seeing are based on the premise that “the last five years have been so good, it can’t go on.” Why not? Europe is two years behind us and their newfound sea legs can only help us. I think we go higher still from here.
Treat the stock market like a 3D Stereogram — take a step back and unfocus your eyes once in a while to get a clearer picture.
Have a great week….
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067