Buy-And-Hold Returns? S&P 500 To 3000 By 2018

| About: SPDR S&P (SPY)

The event we've been thinking about, hoping for, anxiously awaiting finally arrived, but as only an anticlimactic whimper, so far. The S&P 500 (NYSEARCA:SPY) joined the Dow 30 (NYSEARCA:DIA), Dow Transports (NYSEARCA:IYT) and the Russell 2000 (NYSEARCA:IWM) indexes to finally cross its previous all-time high. (In truth, the intra-day high was 1576.09 on 10/11/07.) This accomplishment occurred in a holiday-shortened week with many investors traveling for holiday and school breaks and, because it was also Quarter's end, the meek reaction can't be considered indicative of what might follow; the coming week or two should be more indicative of what follows.

Having crossed into territory in which it has never before ventured, the market is now in uncharted waters and we have to come up with new guides for navigating our expectations. Those who became investors anytime over the past 13 years know a market that is either in bear mode or one that is in recovery; they've never experienced a market that continually makes new all-time highs week after week, month after month. For dealing with this new and challenging experience, we need two concepts to help us balance the opportunities and risks.

  • There's been a lot of talk that the current "bull market" is now four years old, has climbed nearly 120% from the March 2009 bottom and is, therefore, approaching its end. However, recovery ≠ (does not equal) bull market. A market making new bull market highs is different than one that is recouping a previous loss, therefore it should be evaluated by different metrics. In a recovering economy and market, businesses and stocks regain the values they had before investors sold them in panic when it looked and felt like the world was coming to an end. Recoveries from crashes could occur quickly over 2 years or they could drag on for a decade. There's absolutely nothing magical about the fact that this recovery took four years. The market hasn't doubled … we've only come around full circle to where we had been before. It's only when assets, businesses and stocks go higher from this level that a bull market will have truly begun.
  • I recently had an opportunity to watch my soon-to-be 8 year-old granddaughter climb the wall in one of those indoor rock climbing venues. As a proud grandparent, it was amazing to watch her reach out, grab one hand-hold after another, find her footing on lower hand-holds she'd already passed and struggle to pull herself ever higher. Then, when she was no longer comfortable with the height, she let go and allowed the rope attached to the saddle she wore to quickly drop her to the bottom. Then up she went again.

    Thinking back on that image reminded me of the slow, cautious bull market rises and swift bear market crashes of the past 13 years. Each bull market ascent was measured against earlier resistance levels (i.e., "hand-holds") and then the bear market descents were benchmarked against perhaps those same resistance levels that had now become support levels. But we've now crossed into new high territory where there are no hand-holds to guide our ascent. We need a new metaphor to guide how we gauge how high "up" should actually be and to provide clues as to when we might be approaching a reversal.

Right now the best I can come up with is the reversion to the mean chart (see Revisiting 1970′s Secular Bear Market Exit …. Again). Since 1939, the market has gained an average 7.5%/year, even after taking into account two 14-year secular bear markets. Since 1939, the market has stayed within the boundaries of a channel that is 45% above and below that 7.5% average annual rate of appreciation.

If the economy were to gain some traction, the fear of deflation became a distant memory and no new crises appeared on the horizon, then Thursday's cross of 1565 could mark the start of the next true bull market. Perhaps, it might be possible to see the S&P 500 on a trajectory ending in the vicinity of the upper boundary of that channel, or 2500-3000, by the end of 2017-18. That would represent almost a 100% gain from current levels over the next four yours. Now that's what I would truly call a bull market!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.