Longer view shows major indices still at low levels
Looking at the financial markets over a short period is kind of like looking at a small portion of a very large painting. Sometimes that small glimpse is enough to give you a clue about how the rest of the painting looks. Other times, that small portion might not provide enough information to have any idea about what the rest of the picture holds.
In recent weeks, short-term views of the major market indices have not been sufficient to help us decipher the big picture. Today I thought it might be enlightening to take a longer view so we can look back at where we came from to help us gain a better appreciation of where we are today.
Below are charts from 1995 to present of the S&P 500, the Dow Jones Industrials Average, and the Nasdaq. On each I have added a blue line that marks the current level of the index and I have extended the line backwards to make it easier to see the ensuing progress.
Although there have been some dramatic differences in how each of these indices has behaved over the past 11 or 12 years, all three are at about the same level as they were in 1998. In other words, a buy-and- hold investor who has been in the market for that entire period has endured a great deal of volatility for very little gain.
If an investor entered and exited the market since 1998, he could have experienced significant gains or substantial losses, depending upon the exact entry and exit dates.
If I look at these charts as an investor, my attention is immediately focused on the rally of the past six months. Looking back over the period covered by these charts, I see that in most cases, a rally of this amplitude and duration has usually been followed by a fairly substantive correction or consolidation. So while it is tempting to jump into the rising market, at these levels the long-term risk is probably greater than the possibility of short-term returns.
Tuesday, Henry Blodget wrote the following on Yahoo! Finance.
“The early 1930 rally came after the market had fallen nearly 50% in the fall of 1929. The spring rally took the market up nearly 50% again, to a level that was only about 20% below the previous peak.
“That rally, of course, was also the biggest sucker’s rally in history. After the market peaked in April 1930, it crashed again, eventually ending up down 89% from the 1929 high and more than 80% from the 1930 high. The market did not reach the 1930 high again for another quarter of a century.
“Our current rally came after a crash that was actually slightly more severe than the 1929 crash (53% versus 48%). It has taken the market up more than 50% from the low. Our current rally has also lasted slightly longer than the 1930 rally did.
“Today’s rally, of course, may actually be the start of a great new bull market, one that will climb the ‘wall of worry’ back toward the previous record highs. On the other hand, it may yet also be another version of what happened in 1930.”
One of my biggest worries about the current rally has been the overall lack of corporate earnings and Wall Street’s apparent lack of concern. So I found this interesting quote from the April 16, 1930 New York Times:
“On the whole, Wall Street has discounted the effect of smaller earning during the first quarter of this year, it is contended, while an increase in the earning of certain companies would be decidedly encouraging in view of the slower trade this year. The fact that several of the most important corporations have been able to show an increase in share earning in the face of these conditions has been reassuring to a large section of the financial community.”
In other words, Wall Street was willing to overlook the lack of corporate earnings because a few companies were able to buck the trend and there was anticipation that conditions for other firms would improve. To me that sound very similar to the current situation. It is just one more reason to view the current market rally with suspicion and to continue to follow a risk averse investment approach.
F.S.