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The third quarter closes next Monday. While all eyes seem to be focused on the arcane rituals marking the end of a federal fiscal year - strange rites like Continuing Resolutions, Forced Sequestrations, Debt Ceilings, Filibusters, and Individual Mandates - stock market investors might want to take a closer look at the closing price of the S&P 500 next Monday. At its latest all-time high last week, the S&P 500 was up 21% for the year. Today, we're closer to 19%, but we're liable to close Monday slightly above 20% year-to-date. That would make 2013 the 10th year since 1950 with 20% or greater gains through nine months.

The Closest (95%) Historical Correlation to 2013 is 1954

On July 3, I examined the close correlation between 1995 and 2013 based on research by the Bespoke Investment Group (BIG), based on day-to-day price correlations between January 1 and mid-May. Now, Bespoke has updated its correlation studies through September 19. Its top two historical matches are now 1954 (with 95% correlation) and 1995 (93% correlation), two years that are certainly worth a much closer look.

But first, let me quote Bespoke on the nature of their study and what "correlation" means in this context:

"In addition to comparing the S&P 500's return so far this year with other years, we also like to compare how we got here on a day-to-day basis with other years in the past. To do this, we ran a correlation of the S&P 500's closing prices each day this year to the S&P 500's closing prices of every other year (through 9/19) to see which ones have the highest correlation coefficient to 2013." The results of their study?

"The two years that have the highest correlation to 2013 continue to be 1954 and 1995. While a lot of investors correctly remember 1995 as being a good year for equities, for those that don't remember, 1954 was even better. In both years, the S&P 500 was up about 27% as of 9/19, and then it continued to rally through year end. In 1954, the S&P 500 rallied another 13.5% through year end for a total gain of 45%."

In the bigger picture, both 1954 and 1995 were right in the middle of the longest and strongest two bull markets of the 20th Century. They came nowhere near the end of a bull market. In fact, they marked the beginning of the longest and strongest growth legs of those two gigantic "El Toro Grande" bull markets.

  • 1954 marked the center of a 24-year, 10-fold market surge, running from a low of 92.92 on the Dow on April 28, 1942 and ending with an intra-day brush with 1000 Dow (closing at 995.15) on February 9, 1966. The year 1954 was the best year in that bull market, at +45%, but traders were bathed in fear then: The market finally closed above its 1929 high by Thanksgiving 1954 amid Congressional warnings from The Great Crash author, economist John Kenneth Galbraith, who said the market was at "dangerously high levels." (P.S. The Dow rose another 26.4% in 1955.)
  • 1995 was the start of the strongest surge of the 1982-1999 bull market, a 17-year run in which the Dow rose 15-fold, from a lucky 777 on August 12, 1982 to a peak of 11,723 on January 14, 2000. But immediately previous to 1995, the market had declined in 1994, and 1995 was seen as a year of "irrational exuberance." Despite these fears, the market tripled from early 1995 to early 2000.

2013 - The Best Opening Three Quarters Since 1997?

There are some other encouraging similarities between this year and 1954 or 1995. These two years came in the middle of a bull market, but followed a disappointing year. In 1953 - a year in which the Korean War ended and the Eisenhower Presidency began - the S&P 500 fell 6.6%. (By the way, the S&P Index numbers were laughably small that year. The 1953 decline was from 26.57 to 24.81). Likewise, the booming market year of 1995 was preceded by a 1.5% drop in the S&P during 1994. Both 1954 and 1994, by the way, were also mid-term election years, in which there was a switch of control in Congress.

The similarity isn't perfect for 2013, since 2012 was also strong, but we did suffer a flat 2011, in which the S&P 500 declined by the narrowest of margins (-0.003%), "falling" from 1257.64 to 1257.60.

Longer-term, both 1954 and 1995 felt like a big relief rally after a long siege of doubt. According to the folks at Bespoke, there was a long market drought before each of those two surge years. There was no 20% gain in the opening nine months for any of the eight years before 1954, or the five years before 1995, and there has been no 20% gain in the opening nine months for a whopping 16 years before 2013. You have to go all the way back to 1997 to find another year that kicked off with a 20% gain by September.

So, we've waited a long time to see a year like this. We suffered a lost decade from 2000 to 2009, and we still have a lot of catching up to do. As I wrote here in May 2009, a market crash like 2008 implies a historically-strong recovery, and that is precisely what we have seen during the last four and a half years.

The Wall of Worry Will Never Collapse, But….

As in 1995, we hear a daily barrage of bad news, but what we usually forget is that past worries seemed just as huge and insurmountable in years like 1954 or 1995. The biggest political fear in 1954 was called McCarthyism, based on a real fear of nuclear war with the Soviet Union. Back then, visions of another 1929 chilled Wall Street: Professor Galbraith's The Great Crash of 1929 became an instant best-seller.

The 1990s brought similar fears, including inflation and rising budget deficits. Bankruptcy 1995: The Coming Collapse of America by Harry Figgie and Gerald Swanson was a best-seller - four years before America balanced its federal budget.

Today, we see similar fears, but the federal budget deficit is quietly declining once again, reaching $680 billion in the past 12 months (through August 31), almost 50% below the $1.2 trillion in red ink we saw during the same 12 months of 2011-12. Federal outlays are now at their lowest level since May 2009, and tax receipts are at their highest levels since January 2010. Mid-term elections are coming soon, so it's possible that these annual debt ceiling debates won't seem quite so Apocalyptic in 2014 and beyond.

Stocks still carry reasonable valuations. According to economist Ed Yardeni, the forward P/E for the S&P 500 has been "hovering around 14 since the spring." He argues that "if the 10-year Treasury yield remains around 3%, as seems likely for a while, then the Rule of 20 (based on the bond yield) suggests that the P/E could eventually rise to 17." That translates to an S&P 500 Index of 2090 in 2014, another 20% gain.

We're also seeing a shrinkage of available shares through buyouts, mergers, and buybacks. From the first quarter of 2009 through mid-2013, companies in the S&P 500 have bought back $1.5 trillion of their own shares and paid out $1.1 trillion in dividends for a grand total of $2.6 trillion returned to shareholders in the last 18 quarters. Still, many companies remain awash with cash. According to the Fed's Flow of Funds, nonfinancial U.S. corporations held $1.8 trillion in liquid assets as of March 31, 2013.

Today's bull market may seem "long in the tooth," but it only ranks sixth among bull markets in terms of calendar days and fifth in percentage gains. Like 1954 or 1995, we could have a long way to go.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

Source: So Far, 2013 Closely Resembles 1954 (+45%) And 1995 (+34%)