Was March 9th the end of a secular bear market in the S&P 500, or is there more downside to come? Without crystal ball, we simply don't know.
Was March 9th the end of a secular bear market in the S&P 500, or is there more downside to come? Without crystal ball, we simply don't know.
One thing we can do is examine the past to broaden our sense of the range of possibilities. An obvious feature of this inflation-adjusted chart of the S&P Composite is the pattern of long-term alternations between up- and down-trends. Market historians call these "secular" bull and bear markets from the Latin word saeculum "long period of time" (in contrast to aeternus "eternal" — the type of bull market we fantasize about).
If we study the data underlying the chart, we can extract a number of interesting facts about these secular patterns:
The annualized rate of growth since 1871 is 1.87%. If that seems incredibly low, remember that the chart shows "real" price growth, excluding inflation and dividends. If we factor in the dividend yield, we get an annualized return of 6.56%. Yes, dividends make a difference. Unfortunately that has been less true during the past couple decades than in earlier times, a topic I periodically discuss here. When we let Excel draw a regression through the data, the slope is an even lower annualized rate of 1.68% (see the regression section below for further explanation).
If we added in the value lost from inflation, the "nominal" annualized return comes to 8.78% — the number commonly reported in the popular press. But for an accurate view of the purchasing power of our returns, we'll stick to "real" numbers.
Since that first trough in 1877:
The latest (November 18) S&P close is 40% below the 2000 inflation-adjusted monthly-average high, a rise from the 59% decline in March. That March decline puts us about 6% above the monthly average for secular bear market lows. Of course, the bottom in 1932 saw a greater decline over a shorter period (three years versus nine).
Add a Regression Trend Line
Here's the same chart, this time with a regression trend line through the data. This line essentially divides the monthly values so that the total distance of the data points above the line equals the total distance below. Remember that 1.68% annualized rate of growth since 1871? This line illustrates that number.
Regression to trend, as we've pointed out elsewhere, often means overshooting to the other side. The current close is 34% above trend after having fallen 6% below trend in March. Previous bottoms were considerably further below trend.
Will the March bottom be different? Only time will tell.
