Why The S&P Index Will Not Crash Below The March 2009 Lows

| About: SPDR S&P (SPY)

The S&P 500 index is currently trading at 1335, which is 97% higher than the March 2009 lows of 676 on the index. While the index has surged in the last three years, the global economic and financial concerns have also increased during this period.

S&P 500 Index ChartClick to enlarge

This brings us to the critical question - can the S&P 500 index crash below the March 2009 lows in the medium-term?

This article addresses and answers this question.

Before I proceed to the main discussion, I have to mention that the 2009 crash was largely a result of the credit freeze and economic freefall that followed the Lehmann Brothers collapse.

Coming to the current scenario, the policymakers are overcautious and ready to act on any situation even close to a Lehmann like collapse. The option of letting a large financial institution fail has not been pleasant for anyone. Therefore, it is highly unlikely that another big bank or financial institution goes bust. The evidence of what I am saying comes from the European banking system, which is dysfunctional, but still operating on continuous government support.

However, just government support to the economy and financial institutions is not the primary rationale for believing that the S&P will not crash below the March 2009 lows. Of course the reason is related to financial markets and its impact on households.

Below are a few charts on household assets and retirement assets, which will help make a favourable case for the S&P index not crashing meaningfully.

The first chart gives the total household assets as of 1Q12 compared with 2008:

Total Household Assets in United StatesClick to enlarge

As can be observed from the chart, the financial household assets (as a percentage of total household assets) for 1Q12 were 68.8%. Very clearly, the value of a high percentage of household assets depends on the financial markets and its performance.

The $8.6 trillion increase in household assets in 1Q12 compared to 2008 was primarily due to an increase in value of household financial assets (resulting from an increase in stock market indices and increase in value of other risky asset classes).

The second chart below gives the retirement assets as a percentage of total household financial assets.

Retirement Assets as a Percentage of Total Household Financial AssetsClick to enlarge

Retirement assets, as a percentage of total household financial assets have increased from 13% in 1975 to 36% in 2011. Therefore, retirement assets are exposure to highly risky asset classes such as the equities.

The point I am trying to make would be clear from the third chart. The chart gives the relationship between the retirement assets and the S&P 500 index.

Relation between retirement assets and S&P 500 IndexClick to enlarge

Very clearly, the retirement assets have been moving in sync with the S&P 500 index. It goes without saying that most of the retirement assets are exposed to relatively risky asset classes.

What it also means is that the government will do anything that needs to be done in order to save the markets from another collapse or meaningful crash. A 2009 like crash would only erode the value of household financial assets and the retirement assets. Such a scenario can bring civil unrest (when they see their savings vanish in a stock market crash). Certainly, this is not a desirable scenario for the government.

Therefore, in my opinion, it is better and relatively safer to be in quality stocks than being in cash or being invested in government bonds. Having said this, I also believe that the current financial system is not sustainable and might collapse in the long-term. For those times, exposure to gold as a currency will help.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.