The US market is up 20% YTD and we're barely 80% through the year. Time to duck and cover, right? That's well beyond normal performance, isn't it?
Well, what does normal even mean in this context? Mebane Faber, one of my favorite reads, asks this question in a recent blog post. Let's look. Here's Faber's chart for S&P 500 yearly returns.
If 2013 were to end exactly where we are today, it would be about at the 67th percentile. One-third of all years since 1900 have run S&P 500 returns to greater than 20%.
Yet we have the bears telling us that blue-chips are the new bubble. Seems like not a day goes by and some new Cassandra isn't out there saying sell now. Read an article like this and down in the comments you'll be told to buy physical gold and keep your head down for the looming crash. Yet, week after week I read Jeff Miller's "Weighing the Week Ahead" and am reminded that we are actually in pretty good shape and the risk of a recessionary level plunge is vanishingly small. (By the way, if Jeff's weekly survey is not on your Sunday morning reading list, put it there. It's one of Seeking Alpha's bright lights. I turn to it right after my life-long Sunday morning addiction - the comics.)
Some argue that we remain in the secular bear market that began with the 2000 high and hit a low in 2009. Here's a chart from Doug Short's dshort.com (which, I should add, the author uses as a piece in his argument that we remain in a secular bear market):
Note, at the beginning of October we were 102% (adjusted) above the 2009 low. But (and this is a key, sometimes misunderstood point) that's still 16% below the 2000 high on an adjusted basis. With last week's end-of-the-craziness euphoria, those numbers are now up a bit and we're at a new nominal record high for the S&P 500. But for the last proponent of the secular bear market school to throw in the towel, we need to reach a new real (adjusted) record high. Then we can go back and paint the line blue. The question is are we heading for a new real high that will put to rest the secular bear concept? Not by the end of the year, certainly, but sometime next year? My crystal ball is in the shop, but I'm not willing to bet against it.
Market P/E is a bit high if we look only at the historical mean,
but for recent history it looks a bit like it's bouncing off a support level. I'm not willing to concede that we should be looking back to pre-1970 levels for insights into today's market.
Then there's the macro signs. With our new Fed chair, uneasiness about a coming taper would seem to be all but off the table for the short term. Furthermore, unless sanity actually returns to Washington in the aftermath of the shutdown/credit-limit debacle (one can hope, but I'm not counting on it) economic growth will remain hogtied by our do-nothing-good Congress. In that event, Ms. Yellen will have no choice but to keep interest rates at their historical lows.
Or, imagine an alternative scenario, the economy really takes on some steam and shows the kind of growth that finally gets people back to work in large numbers. Maybe inflationary signs begin to be seen in the Fed's tea leaves. "OMG" says Yellen, "Time to taper." "Oh no," Mr. Market replies and goes into a bit of a swoon. But, he'll soon come to his senses, rational creature that he is. "Hey, the economy is growing. People are working again. They're spending the money they're earning. They're even paying taxes, producing revenue to chop at the deficit and shore up the Social Security and Medicare trust funds a bit. What's a hundred basis points or so on rates in a booming economy? Let's party." And SPY resumes its upward climb.
Add that international markets are showing real signs of life as well. VEU (world ex. US) is up 13% YTD after a dismal run over the previous two. Now you start to get a picture of an overdue secular bull in the making.
So, I'm as bullish as ever. This year's run is really nothing out of the ordinary; we've seen its like often enough. The market may be a bit pricey but not to levels that should raise fears of imminent blood in the streets. The new fed chair is going to be cautious about any taper or rate hikes. Maybe, just maybe, the worst is over, or at least on hiatus, in D.C. International markets are hitting their stride. Adds up to a fairly optimistic picture if you're willing to drop the doom and gloom pose.
I think it might just be time to stop bracing for a drop and simply follow the "Buy in October" advice handed down from whomever the éminence grise was who first put it out there for our enlightenment. A third of the month is still to come. I plan to take advantage.