Better Days in Store for 2009

Yesterday wrapped up the second worst calendar year drop in history for the S&P 500. In 2008 it dropped (38.5%). For guidance or just historical perspective, let's take a look at how the 10 previous worst experiences unfolded in the following 1 and 5 years.

Year ……….. % Decline ……… Next Year …… Next 5 Years …………………………………………………....... (Annualized)

1930 …………. (24.9%) ………. (43.3%) …….….. 3.10%

1931 …………. (43.3%) ……….. (8.2%) ………… 22.5%

1937 …………. (35.0%) ……….. 31.1% ...……….. 4.60%

1941 …………. (11.6%) ……….. 20.3% …………. 17.9%

1957 …………. (10.8%) ……….. 43.4% …………. 13.3%

1966 …………. (10.1%) ……….. 24.0% ………….. 8.4%

1973 …………. (14.7%) ………..(26.5%) ………… 4.3%

1974 …………. (26.5%) ……….. 37.2% ...……….. 14.8%

2001 …………. (11.9%) ...…….. (22.1%) ………… 6.2%

2002 …………. (22.1%) ……….. 28.7% …………. 12.8%

Only twice has the S&P 500 dropped very substantially in two straight years.

These drops occurred during the Great Depression in 1930 – 1931 and after the first OPEC crisis in 1973 – 1974. Including those back-to-back 'repeat offender' years, the S&P 500 showed losses in 4 out of the previous 10 worst years.

Those 4 losses averaged an additional (25.03%) drop.

Six out of ten years subsequent to the worst S&P 500 results showed gains. These gains averaged +30.78%.

The S&P 500 showed positive 5-year annualized results following every one of the ten worst yearly drops (including the periods with back-to-back horrible returns). The average of all 5-year periods subsequent to the ten worst single years was + 10.79% annualized.

While past performance is no guarantee of future results, it does make me feel optimistic that better days are likely to follow 2008's year of infamy.

Comments

[Tom Armistead:]

Good common sense analysis.

Jan 01 07:45 AM

[Niner:]

Awright.........

I agree with Tom.

Good article.

No future bashing, no past bashing. Just a straight forward presentation of some facts.

Jan 01 08:39 AM

[Rob Viglione:]

When the sky seems to be falling it is tough to think rationally and see the bigger picture. This sort of analysis helps...

Jan 01 10:13 AM

[filmboard:]

The table is interesting, to be sure. But the conclusion could as easily be that 2009 will possibly/likely be a dropping year. The author's conclusion (and averages) masks the fact that of the 10 years shown, three immediately follow another on the list. Also, I guess we need to ignore the fact that the S&P500 did not begin until 1950, though it begs the question as to what numbers are being used prior to that on this table. And if the figures portray the drops in percentage for that year over the prior year, then you have annual accumulations of 24.9%, 43.3%, and 8.2% drops for the period 1930-1932; 14.7% and 26.5% for 1973-74; and 11.9% and 22.1% for 2000-01. Final point... the actual downturns are not confined to calendar years so using them for analysis may be a specious and misleading tactic; The 70s drop from Oct 72 to July 74 was over 46%; and, there was more than a 45% drop from Jan 2000 to July 2002 when after a 10 quarter downslide it finally turned around. So the conclusion that "better days are to follow" is likely well founded and certainly born out historically; however, the headline proclaiming those better days are in store for 2009 has a strong chance of being wishful thinking.

Jan 01 10:21 AM

[Greg Pinelli:]

There is NO analysis in the article!..There's some simple math with not even a decent discussion of the ranges of returns involved..eg
1. On the Annual decline column we see a range from -10.1 to-43.3%..what's the correlation (r) with the following years return?
2. In the following 5 years we see composite returns from 3.1 to 22.5%..that's an incredible range! It hardly makes the "sky is not falling" an investible mantra!
Com'on....give us something we can get our teeth into.....

Jan 01 10:55 AM

[lorddarley:]

I hope he's right, but his article is simply an opinion. On the flip side, we have a US economy which is based on consumption. The consumption has been financed with gains dating back to our years as an economy with a strong manufacturing base.

When you look at fundamentals, at least 80% of our workforce does nothing that the world really needs. We have huge numbers of government workers, unionized government service providers, packagers of debt (aka banks), lawyers, accountants, and clerical types.

Who needs these folks in a global economy? We are at the beginning of a massive repricing of global talent. Our monolingual, poorly educated workforce has excessive expectations.

LordDarley

Jan 01 11:21 AM

[NOWHEREMAN:]

LordDarley: There are 2 points in his opinion which should scare everyone.

"Only twice has the S&P 500 dropped very substantially in two straight years."

1. the Great Depression and 2. the 73-74 Opec crisis

The 2008 drop encompasses both. It is already described as the worst Financial Crisis since the Great Depression. The Oil Spike qualifies as an Opec Crisis.

Since Mr. Schiff expects Gold to drop and the Dollar to go up and Mr. Rodgers believes it would not be uncommon for gold to drop to the $600 or less combined with your own assessment of the Pedigree of the US work force, I posit that the qualifications for another sequential S&P drop have more credence than a rise.

IMHO

Jan 01 11:53 AM

[NOWHEREMAN:]

The data is historical and cannot be changed. You can either use it or disparage it, but the figures won't change.

The opinion given is a hopefull one.

My opinion is My Opinion based on the Stats given and the description of what occurred. There is more than enough data given to readers to make their own judgements for the 2009 calendar year.

A very good Article for the New Year, full of hope and promise.

IMO

Jan 01 12:05 PM

[schnickelfritz:]

It sounds to me like the whole article is pretty much based on "hope," and not any substance other than "hope." Many of you have been led to believe that if you "hope" long and hard enough, some rationalizattion can be made that "hope" will be your economic salvation. " 'Hope' springs eternal."
Based on the most recent election, I find it amusing that approximately half the population sees their life's solutions based purely on "hope." Just check out the previous comment by Aitvaras.
" 'Hope' for the best!"
Any more platitudes of political oratory and dribble based on "hope?"
Here's "hope" for a better 2009!!!

Jan 01 01:29 PM

[John Lounsbury:]

aitvaras, filmboard and lorddarley - - -

You make very good points.

To those that either criticize the statistics or find value in them, I want to point out that the numbers presented are subject to many interpretations.
Let me list a few:

1. There is a 40% chance of a 2009 loss of 25%.

2. There is a 60% chance of a 2009 gain of 31%

3. The average return experienced in a year following a loss of 10% or more has been a gain of 8.5%.

4. The only time we had a loss graeter than this year (1931) the following year saw a loss of 8.2%.

There are many more possible interpretations, i"m sure, but these four are enough to convince me that there is no compelling reason in these numbers to jump into stocks for a great 2009. Back to aitvaras, filmboard and lorddarley, who have itemized some market counter currents.

The one observation I take away from Paul's data is that it is probable that investing now will be profitable over the next five years. However, based on ten historical results, there is a 30% chance the annualized return will be less than 5% and a 60% chance the return will be less than 10%.

Jan 01 01:48 PM

[Paul Price:]

The data presented here looks even better when viewed in conjunction with the valuation metrics in a prior article.

seekingalpha.com/artic...

Jan 01 02:41 PM

[javnnf:]

You get only one life to live-- not long enough to optimize over all the outcomes.
Those who are left with any wisdom should read Black Swan by Nassim Taleb. Here are some quotes:
[The Black Swan: The Impact of the Highly Improbable (April 2007)]
>>>>>&g...
Please, don’t drive a school bus blindfolded.

Owing to [...] misunderstanding of the causal chains between policy and actions, we can easily trigger Black Swans thanks to aggressive ignorance—like a child playing with a chemistry kit.

Banks hire dull people and train them to be even more dull. If they look conservative, it's only because their loans go bust on rare, very rare occasions. But (...)bankers are not conservative at all. They are just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug.
<<<<<&l...

More on www.fooledbyrandomness...

Jan 01 02:41 PM

[robert.b.fe...:]

While hope is fine and good it won't feed the bull dog. With QQQQ languishing well below 40 and most other indicators not looking any better I don't see a big rally in the immediate future. I'm going to continue bottom fishing and hedging positions I took on the way down. That being said I'm still on the look out for speculation stocks. I'm currently looking at Hana Biosciences (HANB) going at around .25. While it's PE and debt service prospects are unappealing it has three new treatments in the pipe line that look good: Marqibo which is due to start phase III trials soon, Alocrest which just completed phase II and Menodione. I'm also looking at Still Water Corp. This is a commodities play on paladium and cobalt. With the Russians curtailing out putto create demand this could be a good one for a happy 2009. Happy new year all.

Jan 01 03:19 PM

[NOWHEREMAN:]

If you want to talk about Hope springs eternal, take a look at BSDM and CRDC, I own both. I plan to double up on CRDC on Friday.

Charts suck, but the products get people out of hospitals faster. Hope yadda.

Barron's had happy thoughts on Hyflux( water desalinization ) on Pinks and TNK, on nyse. Own both also.

I don't recommend any of them. I own them.

Owning them does not make them good stocks. It just means that at the time, you though they were great stocks. To me, all of them are great stocks but thats because I own them.

You have to do your own research. IMO

I knew they were long termers when I bought them but did not expect wholesale carnage while I waited.

Jan 01 03:59 PM

[wawsa1:]

There is a lot of money presently on the sidelines. How long can it stay there? Either stocks or commodities or both are going to have significant appreciation.

There is a huge stimulus which will likely create a stock market bubble. The Government needs to create a bubble to get profit on the money loaned.

We'll have a massive rebound over 2009.

Spending habits of Americans can change for a little while but in the long run the folks will return back to their previous habits. We need these folks to start spending again and quelch the "fear" that has put us in this massive spiral downward. Government will do what it takes to achieve this.

Jan 01 05:57 PM

[Alphameister:]

I'm inclined to agree with the author and those who like the 5-year outlook. The lowest 5-year return in the above table comfortably exceeds the yield on 5-year notes at this time, and the average dramatically exceeds the safety-first return. That doesn't guarantee "better days in 2009," but does point in that direction. The two cardinal rules on Wall Street are "Don't fight the Fed" and "Don't fiight the tape." When the Fed floods the markets with money, some things eventually rise in price (with stocks certainly looking like plausible candidates). And while the tape is clearly bearish long-term, the departure from the mean is so excessive (several standard deviations) and the psychological signs of a meaningful bottom so plentiful, that odds very much support the author's conclusions even if the ultimate lows have not yet been seen.

Jan 01 07:06 PM

[mrbill:]

"Spending habits of Americans can change for a little while but in the long run the folks will return back to their previous habits."

Yup. We all know ever since the beginning, in the US, citizens spent their way into success, even fortunes! Works every time. No reason to change things permanently. After all, most of us are sitting on mountains of debt (some with superficial worries), waiting for our government officials (who are economic gurus we can depend on) to help loosen up the credit markets. Once that happens I can rollover my debt using "home re-appreciation", buy a bunch more stuff, and go further into debt. This will fix the economy.

"We need these folks to start spending again and quelch the "fear" that has put us in this massive spiral downward. Government will do what it takes to achieve this."

Exactly. I agree. Governments will do whatever it takes. And you can bet on a near picture-perfect outcome, as is always the case. At least, 99.9% of the time it is. Anyhow, the fear part you mention is just silly. Once Obama sets a floor to housing (by buying every house below median, and wholesale demolition of homes, by the thousands of tracts, and a builder-bailout-packag... for good measure) our homes will appreciate almost magically overnight. Like the tooth fairy bringing you a pre-approved line of credit while you sleep. The demolition part is the quickest way for this to happen. Any time you destroy something that someone worked very hard to create, the outcome is always more wealth (I know it's not in the literature, so consider it a contrarian play). Nevertheless, I'll wait until the S&P is at 1100 to jump in the market, maybe even 1300 just 2 make extra sure. I don't like buying at the bottom. Now THAT is scary.

Jan 02 12:45 AM

[Did U Think...:]

You have heard about climbing the wall of worry? What you are now experiencing is sliding down the slope of hope. Everyone is hoping that there will be a nice return to the good old days where everything was pretty easy and there was milk and honey all over the place. That's right, there will be no sustained rally because unemployment will continue to rise, bad debt will continue to default and credit will continue to contract. We are not getting out of this with a Dow or an S+P which is higher than that of dot bomb. The greatest credit crash of all time will see a correspondingly dramatic economic collapse. Anything else would be the attainment of something for nothing and we have been getting away with that for the last 35 years. Those days are coming to a close. Nothing good lasts forever after all.

Jan 02 02:51 AM

[bobbobwhite:]

Is a risk/reward ratio derived from the figures you used enough of a basis for a prudent investor to go long in 2009? I do not think it is.

This horrid time, it really is different, as the shaky house of cards we Americans have built since 1980 is really coming home to roost(I love mixed metaphors).

We may be a different country after. I sure hope so.



On Jan 01 01:48 PM John Lounsbury wrote:

> aitvaras, filmboard and lorddarley - - -
>
> You make very good points.
>
> To those that either criticize the statistics or find value in them,
> I want to point out that the numbers presented are subject to many
> interpretations.
> Let me list a few:
>
> 1. There is a 40% chance of a 2009 loss of 25%.
>
> 2. There is a 60% chance of a 2009 gain of 31%
>
> 3. The average return experienced in a year following a loss of 10%
> or more has been a gain of 8.5%.
>
> 4. The only time we had a loss graeter than this year (1931) the
> following year saw a loss of 8.2%.
>
> There are many more possible interpretations, i"m sure, but these
> four are enough to convince me that there is no compelling reason
> in these numbers to jump into stocks for a great 2009. Back to aitvaras,
> filmboard and lorddarley, who have itemized some market counter currents.
>
>
> The one observation I take away from Paul's data is that it is probable
> that investing now will be profitable over the next five years. However,
> based on ten historical results, there is a 30% chance the annualized
> return will be less than 5% and a 60% chance the return will be less
> than 10%.

Jan 02 02:30 PM

[Paul Price:]

Also a 60% chance of an average 30.78% one-year gain.

Everyone is entitled to their own opinion.

Jan 02 04:04 PM