S&P Returns Since 1927 Are Important 20 comments
-
Font Size:
-
Print
- TweetThis
Rolling cumulative rates of return are important and useful, but, so too, is a fixed view of returns for discreet periods of time. Calendar year views may relate more closely to the way many investors plan and evaluate their portfolios. Calendar year views are also helpful in visualizing the frequency of negative periods and the severity of asset draw-downs in those negative periods.
Former Fed Chairman Greenspan made a statement in his recent Congressional testimony that may make an 80+ year history appear more relevant. He said:
… modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.
The chart below for the S&P 500 (or it closest cousin in early years) shows calendar year returns since the beginning of 1927 through Oct 24, 2008. [investable proxies SPY and IVV ]
click image to enlarge
We’re not done with 2008 yet, but so far its one for the history books as the chart clearly shows.
On a YTD basis, the S&P 500 index is down 40.3% as of Oct 24. For 52 weeks, the index is down 40.6%
According to historical research by Vanguard, the worst calendar year before now was 1931, when the S&P index went down 43.1%. If we go down more than 2.5% over the remainder of this year, 2008 will be the single worst year for the S&P index since 1926.
Data Note: Vanguard probably has better historical data than we do. Ours is solid from 1950 forward, but we used a construct of “price change + year-end yield” to estimate total return for years before 1950. The results differ somewhat from Vanguard’s numbers, but the story remains the same. We illustrate 21 down years, while Vanguard reports 24 down years. The difference resides in the 1926 - 1949 period.
Inside of the 2008 results, there isn’t a much better picture on a sector-by-sector basis. Only utilities, healthcare and consumer staples have done better than the index overall, and they are still major losers.
Consider the long-term past as well as the short-term and present, when conceiving of the future.
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Philip Davis
-
3
Bill Gross
-
4
Tyler Durden
-
5
TraderMark
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 20 comments:
good years were bought with ever increasing debt.
So the borders are not equivalent in that regard (1927 vs 2008)
Moreover 2008 is still counting !!
S&P at 1100
The turnaround will come when the government gives out a credit towards a subsequent purchase each time something is charged on a credit card.
Govt has to realize that the stock market of today has already permeated everyday life of the western world and has become a major part of the populations' investment. Instead of looking at the stock market as simply that belongs to Wall Street and the rich; it should be looked upon for what it is .... an existing investment vehicle for John Q Public.
More Americans are directly or indirectly invested in the stock market (more than 50% of population) than those who actually pay taxes to the government (40% last I heard on TV).
In that context, government must not let the stock market on its own devices and must be regulated with a kid's glove. Left alone to its own "free market" concept; the stock market will cannibalize its own sibling with the young and the unborn so to speak are left unprotected when logic goes out of the window and fear and panic become the norm.
Best thing the government can do is provide some form of guarantee or insurance on investor capital (stock market shares) against company bankruptcies in the immediate term to restore investor confidence and also the confidence of the majority of Americans directly or indirectly exposed to the stock market such as the 401k, mutual funds, and hedge funds. Later, the govt can use a GSE or encourage private companies to provide stock market insurance policies against bankcrupcies. It will not provide investors and employees full confidence but at least allay their worst fear of companies they invested going bankcrupt.
It is incomprehensible that the govt encourages employees to invest in their 401k without any form of guarantee or insurance of their hard earned money.
Banks tried to encourage savers in investing during 2005 to 2007 stock market boom by using SIVs or Structured Investment Vehicles where the saver/investor capital is guaranteed but the profit potential is not. This technique is effective only during the upturn since savers will not take any risk of losing any part of their savings deposit.
Investors have a different psychology. They are willing to take risk in a falling market; only that fear of the unknown or the abyss keeps most investors on the sideline and prefer to wait.
But time is the worst enemy in a falling market.
Thus the govt, instead of doing the slow TARP process, must guarantee stock market investment for the next 3 months for 3 years with minimum 1 year holding period against company bankcrupcies. Mechanisms should be installed to prevent runaway stock prices once this policy is enforced.
This will immediately halt the downturn and give investors at least 3 years of confidence stock market will not be headed to the dump.
You say gov't must get more involved in regulation and do it with a kid glove. Ah, you are expecting the impossible. As we have all observed - markets and economies are linked world-wide. How is any one gov't supposed to regulate anything of that scope and size with a kid glove. The only thing that works on something of that size are blunt tools and these will all have unintended consequences.
I surely wouldn't want the gov't to guarantee risk investments. There are/were products other than equities for people to invest in to avoid risk. They willingly chose the products to buy. Any learning experience can be painful, but, we will, hopefully, be the better for it in the long term. For example, if you own stock you are part owner of a company ... as an owner, you should demand more from a company going forward ... perhaps things like transparent balance sheets, solid dividend payments, and sensible risk management.
Best way is to form some type of GSE but capitalized by the private sector to provide stock market insurance policies. Buying puts is simply too expensive to most investors and a source of free money to naked short sellers.
Govt guarantee should be used only in time of crisis such as this "once in a century" crisis the world is experiencing.
G7 action will be too late already to form any guarantee measure.
The TARP will simply take time to unfreeze the credit crisis. Banks need time (a lot) to untangle the CDOs, CDSs, and MBSs etc mess. Housing bubble needs time to settle down gracefully in order to avoid a hard thud.
Japan govt is already in a panic stage to start buying stock market shares to prop up their market.
I hope a country, perhaps Japan or Sarcosi of France make a bold move to guarantee stock market shares to start rolling the ball. The US is simply not in a good position to start this ballgame.
Govt buying stocks is simply not very effective since it has a limited fund for stock purchases. They will have to let the investors do the buying. A little incentive can go a long long way towards stock market stability.
Your idea sounds sort of like ... spread enough (borrowed) wealth around until everyone is happy. Er, I believe I've heard that story before.
I'm done here.
Or worse DJ 800 to 1000 range since looking at the 100 years DJ chart shows 800 to 1000 area is the best buying or support area. There simply is no price support between 7200 of year 2002 and 1000 of year 1980. 5000 is a an equal move target for an expanded flat pattern that may not be able to hold if extreme panic sets in.
A complete system shock both psychologically to every country and structurally to most businesses. Also the $600 trillion global CDOs, CDSs, and other securities is basically MAD Part II. Dow Jones 5000 might trigger MAD Part II that can literally bankcrupt most western countries including the USA. How much more damage can Dow Jones 1000 do to the USA and the whole world?
How about 50 years depression? Ready! Hold! Fire!
Which country will resort to facism and/or communism will be the next guessing game.
Free market advocates will be very happy their wish had been fulfilled. Only that they will not enjoy that liberty for 50 or more years.
G7 knows this possibility. That is why EU is rushing in for another Martial Plan before any facist country emerge out of this crisis. Problem is the US and Europe are basically bankcrupt.
Most cash reserves are in the developing countries which are basically not dependent on stock market investments since a majority of their population are not exposed to or have no knowledge at all of their stock markets and its machinations.
Unfortunately most people invest in individual stocks within the index, I don't know, maybe they would like to get the dividends that the individual stocks provide. They hear the mantra that "dividend paying stocks outperform".
And therein lies the crux, over time many of the individual stocks within the various Indexes no longer exist. The Cream of the Crop such as Enron, Bear S., Lehman, AIG which were Triple AAA investments at some point during their histories are all gone taking the individual investor with them. You know, the buy and hold for the future investor.
The individual investor's perception and risk tolerance have both been severely damaged. Holding a Mutual Fund is as bad as being invested with a Hedge Fund.
Within the last 10 years, individual investors have lived with the following: Internet Bubble, Housing Bubble, Ethanol Bubble,Commodity Bubble, Financial and now Solar Bubbles.
Don't expect confidence to resume any time soon. Obama's election will probably foster a major rally. Who knows, DOW 10,000 could be just around the corner.
There are an estimated 8,000 banks in this country, many will fail. The next shoe to drop will be in the Insurance Sector. In addition to the publically traded ones, there are thousands of others throughout the country who probably followed the investment style of the industry leader, AIG.
State Insurance Auditors have a time table, roughly 1/3rd of the insurance companies are audited every year. These audits are Calendar Year based and have standards which have to be met that allow insurers to write XYZ number of policys within each State. The Collateral held must be Marked to Market. This will be the next Shoe.
You might consider starting this way:
Read Every Day Online –
Wall Street Journal, Bloomberg, Reuters, Economist, Financial Times, Business Week, Barron's (and weekly Barron's on weekends).
Read Important Modern Investment Books, such as –
The Intelligent Allocator by Bernstein,
Unconventional Success, a Fundamental Approach to Personal Success by Swensen
When Markets Collide by El-Erian
Read Important Classic Investment Books, such as –
The Intelligent Investor, by Benjamin Graham (1949)
Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay (1841)
Evaluate yourself and your circumstances – your financial, emotional and time resources; your financial resources, obligations, needs and limits; your time horizon for individual investments and your overall portfolio and financial life.
From that point you will have important decisions to make about how you want to proceed. What those decisions are will become clearer to you by doing the above. There is no one way, except the way that fits you best.
Regardless of what you decide, you will need to do these things:
Open Account(s) with major discount brokers (such as Schwab) and/or major no-load organization (such as Vanguard) – or if you will be in futures, with a major futures broker (such as Lind-Waldock), or if in currency with a major retail platform (such as Deutsche Bank FX)
Subscribe to an independent online analysis service, such as S&P Outlook or ValueLine for individual stocks, and such as Morningstar for mutual funds, or an array of commodity and/or currency data and opinions depending on what area you will pursue, if you go that way.
For funds read the prospectuses. For individual stocks and bonds, read the annual reports (including notes).
That will give you a good start. The next set of questions will present themselves as you do those things.
Your welcome. You are right. There are far too many gratuitously abusive comments left on Seeking Alpha. Let's hope the positive voices and those with thoughtful dialog dominate, so that those that seek to reduce the level of the dialog down to their level will eventually go away.
Richard