Stocks Are Up 100%! So What?!

Includes: DIA, QQQ, SPY
by: John Tobey, CFA

It did it. The stock market has doubled. So, what does that imply for the period we've been through. And, more importantly, where are we headed now?

Dates picked determine the message

About that 100% - why was the low in early March 2009 picked? We know that by picking certain beginning and ending dates, virtually any performance picture can be painted.

Well, early March was the stock market's bottom. But that implies that the market's movements before that date are inconsequential. Clearly this is incorrect.

More problematic is the idea that a rate of return can somehow discern both the markets' cause and future returns. The following graph (click to enlarge) shows the problem with focusing on any one performance period and, especially, using it as a forecasting tool.

Click to enlarge

Correct approach: Analyze market cycles and their reasons

The stock market is in constant motion, resulting from new information and investor attitude changes. To understand stock market moves, then, we must go with the flow - tracking and analyzing the underlying fundamentals and attitudes alongside the market's movements. Only then can we have the understanding necessary to develop a view of what the future might have in store.

We're not up 100% - We're in the third investor buying period

In Rate of Developing Bull Market Trend Could Be Precursor to Buyer's Panic, I describe how the market got from early 2009 to here. Underlying the market's rise has been steadily improving fundamentals. Volatility has been caused by the on-again, off-again investor attitudes towards U.S. stocks.

The future is not a continuation (or reversal) of the 100% rise

What does that 100% return mean for the future? Nothing. Looking only at returns leaves us with this forecast: The market could rise further, or fall back, or meander.

On the other hand, examining that period's inner workings gives us the picture we need.

So... Ignore that exciting (or worrisome) 100% performance number being bandied about. It is of no help in understanding what has gone on or in forecasting what could happen next.

Disclosure: Client positions: Long U.S. stocks and U.S. stock funds