Saturday marked the ten-year anniversary from the depths of the stock market correction during the Great Recession. The S&P 500 (SPY) troughed at a closing price of 676 that fateful Monday, March 9th, 2009. The next ten years have featured an extended economic expansion and a long bull market. This article looks at this strong market run and compares it to rolling ten-year periods for an extended market history stretching back to prior to the Great Depression.
The graph below shows rolling ten-year price returns for the S&P 500 and its predecessor indices. The data series stretches from January 1938, the first month in which I have a full trailing ten years of records, through Friday's close. The orange line is the average ten year change - the ending index level divided by the index level ten years prior - of roughly 203%. That translates into a just over 7% annualized price return; throw in a roughly 3% historic dividend yield and you are at the long-run 10% average return for the index.
The trailing ten-year price return of roughly 405% from the 2009 low is a tremendous gain that quadrupled investors money over this decade, but it not unprecedented in the dataset. The biggest ten year price return was 493% during the ten-year period ending September 7th, 2000. The period between 1949-1959 also featured similarly strong returns at the peak. While there have been periods with similarly impressive ten year returns, only roughly 2.6% of days in the dataset had trailing ten year price returns higher than Friday's close.
I showed this chart to a colleague and that person's first instinct was that this chart signaled that the market was overvalued. While the market has rebounded strongly from the 4Q18 swoon, the recent gains in the rolling ten-year returns have more to do with the very negative returns from 4Q08 and early 1Q09 falling out of the calculation period.
From the March 9th, 2009 lows, the S&P 500 had a 65% price return through the end of 2009. Readers should keep in mind that unless that return is repeated over the remainder of 2019 that the trailing ten year returns will recede as that strong period falls out of the data. Spoiler alert: a 65% price return for the S&P 500 is not happening for the remainder of 2019.
This is a reminder that this has been a historically long economic expansion and extended equity bull market. If the economy manages to avoid contraction in the first and second quarter, this will be the longest economic expansion in modern U.S. economic history. While some of the past decade's outsized gains have been driven by the severity of the 2008-2009 correction, investors should recognize that these types of ten-year returns are rare. Over this dataset, a ten-year period was 5x more likely to experience a falling stock price over ten years (i.e a cumulative price return of less than 100% in the chart) than a gain as great as the current trailing ten-year period.
This is not a valuation chart, and should not be used as such. It does highlight the historic strength of recent returns. If we roll this chart forward for another eighty years, we will see mean reversion. The extended market gains of the past decade are likely to begat subnormal future returns.
Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties, and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
Disclosure: I am/we are long SPY. 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.