Tuesday, February 17, 2009

12 Lost Years For S&P 500

S&P 500 fell back below the 800 level tonight. That is the lowest in this economic cycle apart from one trading day in November (November 20). The reason for this is of course that corporate earnings are deteriorating faster than ever, with the aggregate profit for all S&P 500 companies turning negative for the first time ever.

Another way of looking at it is going back to the first time the S&P 500 rose above 800. That is relevant because it illustrates how long a "buy and hold" strategy has been a losing strategy, something which in turn illustrates the depth of the slump.

While people who have held stock during that time have received dividends, the opportunity cost in the form of interest bearing assets (particularly those of a similar risk level) is in fact higher than dividend payments, meaning that simply looking at index levels if anything underestimates how bad the "buy and hold strategy" has been.

If you then look at the historical data, it turns out that the first time the S&P 500 was trading above 800 was in February 13, 1997, slightly more than 12 years ago.


Anonymous Anonymous said...

Would all these monetary pumping measures eventually increase stock market indexes? Superficially - while real values decline.

12:31 AM  
Anonymous Anonymous said...

Well, how would you compare the total return (the value of the undiscounted cash flows + capital gains without transaction costs) of the S&P 500 or any US Stock Index with the total return on a ten year bond purchased before the dot com crash?

It is somewhat funny if mundane government bonds outperformed.

2:20 AM  
Blogger Stewart said...

But aren't you comparing a peak against a trough? If the S&P in 1997 was a boom, and the S&P today is a bust, then how useful is it to just compare the nominal levels?

3:45 AM  
Blogger stefankarlsson said...

Government money creation will usually raise the nominal value of stocks, but not necessarily the real value.

And for reasons stated in the post, it seems pretty certain that government bonds (and indeed any bonds not issued by a bankrupt company or state) outperformed stocks.

And yes, I am comparing boom (though not exactly peak, the S&P 500 rose some 90% in the coming 3 years) conditions with bust conditions. But it is still useful given the often stated assumption that stocks will always outperform in the long run.

2:14 PM  
Anonymous Anonymous said...

Great Website.

Keep on it.

HM, Oporto, Portugal

5:53 PM  
Anonymous Anonymous said...

The equity market does NOT always outperform the bond market in the long term (10+ years) but the odds are squarely in your favor. Go back and look at rolling 10-year returns (since 1927) between the S&P500 versus the Barclays Aggregate bond index and you'll find the latter underperformed equities by a big margin.

4:18 PM  

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