A little Ditty about Jack and the S&P 500

I live in Bloomington where we often have sightings of John Mellencamp in the grocery store. Jack and Diane is one of his hits. Pardon me for messing with Jack and Diane to make some points about the stock market valuation today using the S&P 500.

As you know, I love looking at data as much as gazing upon a curvy bottle of Jack (Daniels). Stock market values have been quite volatile lately and have gotten a lot of attention. At the center of that attention was the previous very high value of the famous P/E ratio followed by recent stock values that are lower than the scum on a Tuna’s belly. While there is nothing wrong with P/Es and looking at today’s values of stocks, that focus misses a lot.

Suppose you heard that Nathan gained a bunch of weight. You might say, poor Nathan. He gained all that weight. He must be on the famous Brad diet featuring large Ribeye steaks and extra-large Guaymas shrimp. But then I tell you the rest of the story – Nathan previously lost 50 pounds when he mistakenly tried exercise for several weeks. My point is that large changes today are often preceded by opposite large changes of yesterday.

That caused me to search around on the Internet for historical values of the S&P 500. There I learned that the S&P on January 1, 2000 had a value of 1426.* I also learned that on January 1, 2018, it was 2790. In those 18 years, the S&P 500 value had almost doubled. Groovy. I took out my Casio fx-300ES and learned that the increase over those 18 years was about 4% per year. If you thought the stock market at the beginning of 2018 was over-valued, then I would say, yeah, but it only produced a 4% annual rate of growth over all those years.

Then I looked at more of the data. I found that after hitting 1426 in 2000, the S&P 500 never exceeded 1426 until 2013 (I was looking at monthly values of the S&P on the first day of each month). It came close to 1426 on January 1, 2007, but then the world fell apart. Wow. Basically zero growth in the S&P for 13 years!

I wondered what normal growth would have produced over those 13 years. Starting at 1426 in January 2000, if the market grew at an annual compounded rate of 4%, it would have hit 2375 by 2013. If it had grown at an annual compounded rate of 6%, it would have reached 3042 by January 1, 2013. In 2013, it was neither 2375 nor 3042 – it was stuck at the level reached in 2000!

Key point: With such horrible past performance, it does not seem crazy that the S&P 500 would recover after 2013. It does not seem weird that it would make up for more than a decade of lost growth. From a value of 1480 in 2013, it rose to 2790 in the next five years. Yes, that is a big increase. Yes, that is almost a doubling of the market. But if you consider the annual compounded rate between 2000 and 2018, it is less than 4% per year. If it had risen over those 18 years by a respectable 6% compounded annually, it would have reached 4070 by January 2018.

As I write today the market is closing in on 2800. Is that too high or too low? I don’t know. But I do know that markets go up and down. Surely today’s values are very high compared to the very low point after the last global recession. But they do not seem out of line when you take a longer view of 18 years.

* The data I used are monthly values on the first day of each month. If the S&P 500 had higher or lower values than on the first day during the month, then some of my comparisons might not be valid. I think the overall trends and conclusions are fine. The data came from http://www.multpl.com/s-p-500-historical-prices/table/by-year