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  

Stocks and Apples

I don’t like to write about the stock market. While the values in the stock market are often related to global macroeconomics, the changes more often mirror my dance moves after a night of consuming JD. But like a good bottle of JD, it is not easy to ignore Da Market.

So today I focus on Da Market as measured by something called the Wilshire 5000. The Wilshire 5000 is not as well known as its cousins: the  DJ Average, the S&P 500, or the NASDAQ. Wikipedia defines the Wilshire index as a market-capitalization-weighted index of the market value of all stocks actively traded in the United States.

I am writing about the stock market because we are obsessed by it. Everyone watches the market indices daily and we cheer its upward advances. More popular than the Philadelphia Eagles, we can’t wait until its next upward movement. But nasty people called shorties tell us that the market, like the apple that supposedly hit Newton on the head, must come plummeting down to earth. With apples, they cite something called the Law of Gravity. With stock prices, it all has to do with Pee Wee Herman or PEs or something like that.

Apples or stocks, what goes up must come down. So I decided to look at the data today and report to you what I found. Take a deep breath – there is no forecast here. Do with it what you will.

Before we begin looking at my huge table below, let’s make one point. The Wilshire 5000 went from a value of 3,291 in 1990 to 27,655 in 2017. When it comes to these 28 years, it is pretty clear that Newton had nothing to say about stock prices. If my calculator is correct, that amounts to a nominal capital gain of 742%. I will take that.

But let’s not stop there. Most people are not as conservative as me. Call me Buy and Hold Larry. Other people are more active in stock markets. Others might have a shorter horizon than 28 years. That’s who my wild and crazy table is for.

What’s in the table? Betty wonders what I do in my office all the time. Basically, I make up tables and rearrange the flowers in my JD bottles. Anyway, the table below was created by going through 324 months of data, one month at a time. I found there were 10 time periods between 1990 and 2017 in which the value of the market peaked, fell for at least a few months, and then returned to its previous peak. The idea of this kind of breakdown is to see what happens after stock prices begin to slide.

Begin with the first row of the table. In June of 1990, the market peaked and was 5% higher than the previous peak. After June of 1990, stock prices fell. They fell and then rose until reaching the previous peak in June 1990. It took 9 months to regain that previous peak. 

This down-up pattern happened 10 times since 1990. Typically prices began falling after a 22% increase since the previous peak and then took about 20 months to fall and then rise to reclaim the previous peak.

But notice there are large variances among the 10 time periods. Half the time, it took 10 months to recover. But notice that in five of these episodes, it took 5 months or less for stock prices to recover. And then there were the episodes in 2000 and 2007 where it took 81 and 63 months, respectively, to regain the previous peak.

It is pretty clear from the table that the time it takes to return to a previous stock price peak is highly variable. Many times it took less than half a year. The average time is less than two years and the median time is less than one year. And then – tada – there were two times when it took 5-7 years. So if the stock market does seem to rise over time, your recommended behavior very much depends upon your time horizon. If you can live through poor stock markets for 7 years – then the past suggests you have no worries. Buy a sailboat. 

The final table column is interesting too. It lists the percentage change from the previous peak to the subsequent peak and downturn. For example, the second line in the table says that between 1990:6 to 1994:1, the stock market rose by 37%. It was after that 37% increase that led to stocks subsequently falling and then rising again. In the case of 1994:1, a previous increase of 37% led to a 13-month cycle. It is interesting that the longest cycles in the table (81 and 63 months) were preceded by relatively modest increases in stock prices of 12% and 10%. The 42% increase in stock prices before 2015:7 surprisingly lead to a down-up cycle of only 11 months (before prices returned to previous highs).

In short, there does not seem to be any correlation between previous stock price increases and subsequent months of return to the previous peak stock price. And thus the 25% increase in stock prices between 2015:7 and 2017:12 does not warrant any special concern from the standpoint of this analysis.

When will prices hit another peak? I am not sure. But if and when stock prices begin to fall, this analysis suggests that the time before the next peak might only be a few months. Of course it might be 8 years too. Those who would scare you out of stocks right now ought to explain to you when they think stock prices will fall – and then when they will return to the previous peak.  

Peak      Months    Wilshire Percent

               To Next    Value      Change

               Peak

1990:6      9             3,446            5

1994:1     13            4,709          37

1996:6       4            6,629          41

1997:2       3            7,647          15

1997:10     4            9,215          20

1998:7       5          10,822          17

1999:7       4          12,640          17

2000:3     81          14,096          12

2007:10   63          15,556          10

2015:7     11          22,097          42

Average  20                               22

Median     5                                17

Happy Trails or Fearthquake 2?

This is dangerous. It is Saturday and the time I usually begin the drafting of Tuesday’s blog post. The financial markets will open and close on Monday before I post my usual dribble. Common sense would argue to let the experts stick their necks out and say stupid things that turn out to be wrong. I could instead write about Donald’s ties or Hillary’s latest pantsuit. But no, I decided to join the fray. Don’t ever say that economists don’t live life on the edge. Please note the dripping sarcasm.

Anyway if you have a television or a cell phone, you know that financial markets did a crazy dance on Friday. The main market indexes closed 2% down and US interest rates rose. I am guessing that in some places gravity pulled things up and sinners read Bibles. It was quite a day.

Those of us who were alive and over the age of seven in 2008 remember a similar decline in the markets. In that case one decline led to another and it wasn’t long before billionaires were removing zeroes from their wealth numbers. So if people are a little crazy this week it is because they have personally seen the fearthquake’s ability to turn everything upsidedown. See last week’s post if you don’t know the word fearthquake.

Many of us are beginning the football season unsure of what to bring to the tailgate. Should we bring expensive bourbon or PBR? Was Friday a false signal? Was Friday an exaggeration? Or was Friday the beginning of hell?

I am guessing that Friday was an exaggeration. Mom, that truck is going to hit us. No it isn’t. Yes it is. No it isn’t. Well, it isn’t really a truck. It’s a toy truck.

In my stupid example the truck is a metaphor for rising interest rates. On Friday we saw what happens when more and more people became surer that a truck is going to hit them. Fed officials said this. The ECB said that. Japan said so and so. All that information helped people become more sure that interest rates are going to rise and stocks plummeted.

I don’t question any of that. But what we collectively are not sure of right now is how big the truck is. A truck is coming but how devastating will be the resulting collision?

One view is held by the naïve mathematicians. Naïve means a strong belief in mean-reverting behavior. Suppose you averaged 180 pounds for most of your life and you get ill and lose 20 pounds. A mean-reverting forecast would have you gaining 20 pounds and going back to your normal weight. If an interest rate had an average of 5% and is now 2%, then a similar approach would believe the interest rate is headed back to 5%.

Mean reverting forecasts make a lot of sense. But notice they are based on an “everything else is the same” assumption. You dropped weight because of illness. When the illness departs you gain back the weight… if everything else is the same – your eating is the same, your exercise is the same, and you still have most of your teeth.

But mean-reverting behavior makes less sense if much has changed. With respect to interest rates, has anything changed? It depends on who you talk to or read. My Republican friends would tell me that Obama has destroyed the US economy. As such capital is worth less, the economy will grow slower, and the trust in bonds has diminished. Furthermore demand, like the final third of a cheap cigar, is harder to draw and is leading to permanently lower inflation. My Democrat friends would point to the negative impacts of income redistribution, globalization, and deplorable Republicans in harming economic growth, demand, and inflation.

If these lovely people are correct, then the usual pressures that would produce a return to a 5% interest rate (from the example above) are missing in action.  That means that the changed economic reality of today and tomorrow does not imply a return to any specific higher interest rate. Surely rates will rise but will they rise by 1%, 2%, 3% or more?

These are some of the questions discussed at our Saturday tailgates. Surely our favorite teams will win by many touchdowns and the deviled eggs will be delightful and make the JD go down ever so nicely. But don’t expect that these questions will be resolved on Monday (yesterday) or today. Get your seat belt on for another good ride. Or maybe they will be resolved and today will return to unicorns and methane-free cows. 

I am guessing that the bucking will go for a while but when the dust is settled we will be back on our slow-growth economy with nervous stock prices and interest rates. Interest rates will rise but ever-so-slowly. 

I’ll end this with the lovely words that Roy used to sing to Dale,

Some trails are happy ones,
Others are blue.

It's the way you ride the trail that counts,
Here's a happy one for you.

Happy trails to you,
Until we meet again.
Happy trails to you,
Keep smiling until then.

Who cares about the clouds when we're together?
Just sing a song, and bring the sunny weather.

Happy trails to you,
Until we meet again.

Riding the Bull in China by Guest Blogger Buck Klemkosky

Remember the dot.com era in the U.S., especially 1999 to March 2000? Technology stocks ruled, valuations were outrageous, the economy was entering a new paradigm and “this time is different” justified prices. The Chinese markets have experienced the same hyperbolic price increases in the last 12 months.

What most U.S. investors don’t realize is how large the Chinese stock markets have grown in the last decade in terms of listed companies’ market values. The Shanghai Stock Exchange, which has more blue-chip companies, is ranked third in the world; the Shenzhen Stock Exchange, which has more technology and healthcare companies, is ranked seventh. Chinese A shares are listed on the Shanghai and Shenzhen exchanges. Chinese companies can also list H shares on the Hong Kong Exchange, which is ranked fifth in the world. Several hundred Chinese companies have also listed their stock in the U.S. In total, Chinese stocks had a market value of $10 trillion at the end of May, second in the world to the U.S. with $27 trillion.

The Chinese exchanges had a previous stock market bubble that deflated in 2007 with stocks dropping 72 percent and languishing for seven years. Starting in mid-2014, stock prices started to increase steadily and experienced hyperbolic moves in 2015. The Shanghai Index was up 60 percent and the Shenzhen Index 122 percent when prices peaked on June 12, 2015. Since then both exchanges have technically fallen into bear markets, defined as a market decline of 20 percent or more. The Shanghai Index has fallen 28.6 percent from its peak and the Shenzhen Index 33.2 percent. It was a 12-month bull market and a three-week bear market thus far. $3 trillion of market value has been wiped out to date.

Where the market goes from here is anyone’s guess. Chinese citizens have accumulated $21 trillion of savings, thus the Chinese markets are retail-driven as opposed to institutional; individuals account for 90 percent of stock trading. The Chinese government seems to have encouraged the bull market as they reduced lending rates four times since November 2014. And Chinese investors have not been shy about using margin (borrowing money to buy stocks) as it increased from 400 billion yuan to 2.2 trillion yuan ($354 billion) in the last 12 months. China is a big country of 1.13 billion people, but over 40 million new accounts were opened in 2015. Although there are now about 250 million brokerage accounts in China, it is estimated that there are fewer than 100 million investors – less than 10 percent of the population. The typical account trades once a month so the Chinese are more speculators than long-term investors.

Why would the Chinese government encourage its citizens to invest in the stock market? Property prices have started to deflate in most cities so this is an alternative way to create wealth. Also, Chinese nonfinancial corporations have some of the heaviest debt balances in the world; higher stock prices would allow them to replace debt with equity and reduce risk. Higher stock prices would also allow private or state-owned companies to go public; initial public offerings (IPOs) set new records in 2015. In fact, many Chinese companies that had listed in the U.S. and Hong Kong are delisting and listing on the Shanghai and Shenzhen exchanges because of higher valuations there.

Deflating prices in the property and stock markets could also deflate domestic confidence and hinder China’s policy to become more of a domestic consumption-driven economy as opposed to investment and export-driven. It certainly will not help China sustain its 7 percent economic growth objective. It may also delay China’s stocks being included in world market indexes such as the MSCI Emerging Market Index, which was one of the reasons for recent Chinese investor enthusiasm. Beijing has some policy tools to help stabilize the markets, such as raising margin requirements and restricting short-selling and new IPOs. Time will tell whether they can prevent an all-out collapse of the market.

The S&P Express: Off The Rails or on Schedule?

Is the stock market over-valued? Are recent ups and downs the warnings of a weak future stock market? Can you overcook frog legs? Stockholders want to know answers to these questions.

Trying to forecast the future direction of the stock market is more impossible now than ever. So I am giving up on that and will try to explain why below. It is perfectly okay to punt on such things. Sure, there are snake oil salesmen who will forecast quite assuredly on any day at any time. But as they say – you gotta know when to say when. This stock market is wandering like an office worker on Tuesday night in Gangnam after one too many Soju.

I am going to use the S&P 500 index for my discussion below. I could have used any other major stock index and come to the same conclusions. Essentially these indices track stock prices of the largest American firms. They are measures of “da market”. The S&P 500 tracks the 500 largest US companies.

Today’s blog is more about the data and less about the theory.  I usually like starting with theory because it makes sense. For example, a stock is supposed to measure the value of the company. If investors believe that a company is doing much better these days and it has higher profits to prove it, then more people want to buy that stock. 

They buy it because they anticipate the company might issue dividends to the stockholders or they think the price will rise higher in the future. As they buy more of that stock the price often rises until the point at which people feel the price is high enough relative to its rewards.  If we are looking at the S&P 500, it often rises when the whole business sector is doing better – meaning more dividends and higher expected stock prices across the largest and most representative companies in America.

Stock prices may rise for many reasons. You might be unhappy when your local bank lowers the interest rate on your saving account to .00003%. So you take money out of that account and buy a share of the Jack Daniels Company. Any local or global event that induces investors to redirect assets away from other investments and into US stocks can cause the S&P 500 to rise.

That’s the end of my maco-finance lecture. The reason for reviewing some of this theoretical minutia is that there is plenty of difference of opinion about the future course of the stock market based on theory. There is ALWAYS plenty of difference of opinion among theorists about the market. There might be more now than usual but it seems to me the overpowering case for stock price uncertainty is not the theory. I think it is in the numbers.

Let’s suppose you have a friend and his name is Mabby. Let’s suppose Mabby weighed 150 pounds for the last 17 years. Knowing nothing about Mabby you might be quite confident that next December Mabby would weigh about 150 pounds.  Now supposed you had another friend named Abbmar. Abbmar weighed 150 pounds a year ago. Last December he weighed 350 pounds. In March he weighed 200. What is your best guess as to Abmar’s weight in three months? I am guessing you would have a lot of uncertainty about that prediction and you wouldn’t bet a lot on its accuracy.

That’s the way I feel about the S&P 500 right now. Most graphs of the S&P compare its value today to what  is was recently. Most geniuses compare it to a low point in 2009. Since then it has oscillated quite a but but the main story is its upward trend. But that little bit of history is very misleading since it looks at today relative to a recent low value.

So I decided to look at the S&P 500 going back to when it was just a little pup in 1950. I deflated all the monthly values for general inflation because you cannot compare apples and oranges or something like that. Then I graphed it. I could have calculated a bunch of really cool statistical numbers but sometimes just looking at the graph is enough. See the Chart below. (Note: The S&P 500 value today is approximately 2100. But when you deflate it by a CPI value of about 234, you get a number more like 8.)

·        From 1950 to about 1968 the real S&P 500 rose from a value of about 0.75 to about 3. The line looks pretty smooth despite there being plenty of ups and downs over those 19 years.

·        From the end of 1968 to the middle of 1982 the market was generally declining from about 3.0 to a low value of about 1.0. So we had about 15 years of a downward trend.

·        Then we had another time period of S&P expansion with few major downturns from 1.0 in 1982 to a value of almost 3.3 in early 1994. It took about 13 years but we got back to an old peak value of around 3.

·        In short we had three long cycles from 1950 to 1994 and the market value rose from about 1 to 3 in those 45 years.

·        Then it gets really weird. The S&P started drinking too much JD.  The real S&P 500 almost tripled from about 3 in 1994 to almost 9 in early 2000. The market dove from that peak of near-9 in early 2000 to just above 4.5 in early 2003. It reversed and went to above 7 at the end of 2007 and then to about 3.5 at the end of 2009. It is closing now again on 9. Are you seasick yet?

What can we say? First, we used to have long term trends in market direction that lasted for a decade or two. Now we have significant directional changes that last for at most a handful of years. Second, with those rapid direction changes go large percentage changes. A statistician might say that the standard deviation or variance has increased. Others might say the data is much more volatile lately. No matter how you say it – the market seems very unpredictable right now. 

Finally, even with all this craziness – it is not  easy to know what the most relevant previous peak is. The market hit 9 twice so maybe that is the new peak. But those peaks came after some unique situations and may have involved bubbles. One recent peak was squeezed between the 9s – of about 7.5. Today we are well above that one. There is also the previous high level of about 3. If that is the relevant peak then the market has a lot of room to fall in the future.

Being at or near the highest of the past peaks makes it hard for one to forecast anything good for the future value of the real S&P 500. So I did one more thing. I drew a line of constant 5% real growth from the peak value of 3.0 in 1994. ( See the red line on the chart below.) Today that 5% constant growth line produces a trend value of about 9.2 for the real S&P 500. Thus if we just erased a lot of crazy ups and down of the last 22 years and replaced all that with steady real growth of 5%, we would be at a value similar to what we experienced last week in the real S&P 500. In one year, it predicts a S&P 500 value of near 9.7.

So there you have it. Numbers don’t lie or do they? Much of my analysis suggests we could be in for a significant decline in the stock market. A trend analysis suggests the opposite. Of course, much depends on the theory. Are we really back to theory again? 

Is the Stock Market Over-Valued?

The stock market swooned last week and has been bouncing around ever since. “Surely the market is over-valued” is a comment that you hear frequently.  Agreement with such a statement means that many people will be very worried because it implies that stocks have peaked and will stop rising.  Retirees never like to hear that since their future incomes are tied to future growth in stock values. But all of us are concerned – no one wants to see wealth disappear. Simply – whether you are young and beginning to save or old enough to be on a regular diet of prunes – it hurts when stock prices stop rising. It hurts even more when they fall.

So what is the truth here? Are stocks going to stop rising? Fall? Or is all of this nonsense and stocks will continue rising?

Below you will see why I am not pessimistic about stocks. But let’s begin at the beginning. What does it mean when people say stocks are over-valued? If your boss tells you that you are over-valued, you know it isn’t a compliment and it probably means no wage increase is imminent. The word “value” is a common one that most of us understand. All things have value. Even my old pair of jeans has value to someone. 

Value, however, can be a tricky thing. How about those old jeans? Some of my well-dressed friends would toss a pair of old jeans as soon as the fading begins. In contrast, my hippie friends won’t even wear a new pair of jeans until they have washed them enough times that they are not only faded but have holes in the knees. Point – the same product might have very different values to different people.

Economists recognize this dilemma but point out that markets are places where values are assigned through prices. If a house sells for 1 million dollars, that’s the value of the house. The seller may be unhappy with that price and the buyer ecstatic – but the economist records $1 million. That’s the price at which both parties agreed to the transaction.  So – implicit values can be almost anything but market price is an objective criterion widely accepted as value. If we want to know if stocks are over-valued then we use stock prices. 

What does it mean for stock prices to be under-valued? There is no single meaning. The popular way is to use something called a price/earnings ratio. P/E has two parts – a stock price and an earning figure. Think of a single firm. Suppose its stock price closed at $100.  When you buy that stock for $100 you are hoping it will be a good investment. For the moment forget the capital gain you might receive by buying low today and selling high in the future. What’s left is a dividend you might receive from that share. Let’s suppose the earnings of the company are only $1. In that case, since dividends reflect earnings, the most you would expect to receive for your $100 investment is $1. That’s a 1% return. Ugh.  That stock is over-valued at $100. If you had paid $20 for the stock, then your return would have been a much better 5%.

Some of you are waving your hands! Larry – when you pay $100 for a stock you have it for more than one year. So what matters is not just one year of dividends or earnings – but what happens to earnings over the future. And for that question/comment you get a gold star. But that’s what gets us into trouble with this price/earnings approach. The current price and earnings data are known but are not perfect. But to use future earnings brings in unknowns and expectations and lots of different opinions. Ron might think a stock is vastly under-priced because he sees large increases in future earnings. James is more pessimistic about earnings and thinks today’s stock is highly over-priced.

So while the price/earnings approach is one that is widely used – it isn’t perfect for determining when and if the stock market will fall or rise in the future. It is a valuable approach but it leaves room for other ways to think about stock prices. Since I am about as boring as a rock in a stream, I like intuitive simple approaches. Consider some facts about the market. Here I am using the S&P500 price index. I downloaded data for the time period from 1950 to September 2014 from a website (https://finance.yahoo.com/q/hp?s=%5EGSPC+Historical+Prices ).  I then graphed the data. I converted all this daily data to annual averages. My limited abilities mean I couldn’t get the graph on this page. But you can find a graph at the link above.

·        Similar to my waist size – the S&P500 has had up and down cycles many times but it has trended upward.

·        The value of the S&P index in 1950 was about 17 and now hovers at about 2000. You math jocks can figure out the rate of return of $100 invested in 1950.  It is a pretty big number. If you gave that money to Uncle Charlie (or Uncle Sam) in that year, your return might not have been so good.

·        During those years there were many times when the market surged ahead only to return to more sober (lower) values. Many analysts point out a period from the early 1970s to the early 1980s when the market was essentially flat. But that is about the only time since 1950 when the market did not pop back in a more reasonable period of time.

·        Looking at the graph from 1995 to 2000 and then from 2003 to 2007 the increases where spectacular. Both peaks were followed by declines that lasted 2-3 years. The declines were followed by more increases.

·        There were also interesting time periods when stock prices rose precipitously but did not fall for extended time periods. If you start in about 1975 the market rises through the early 2000s with several major spurts followed by shorter setbacks.

The above points are pretty well known but they do underscore one fact – market gains always have setbacks but those time periods vary greatly in their intensity from a couple of months to several years. Gains do not necessarily imply a seriously stagnant market price.

Now one more point. If you put money into the S&P500 in 1995 or 1996 and held it until it reached 2000 last month – your annualized continuously compounded yield would have been around 7%. That annual appreciation is very much in line with stock returns over a much longer period. An average market, therefore, is expected to give you about 7% per year. Now consider the recent time periods of so-called explosive growth. If you invested money in the year (first column below) and sold when the market hit 2000 recently*, your investment would have earned the average compounded rate (column 2) over those number of years (column 3):

1997      4.5%   17

1998      4.3%   16

1999      3.0%   15

2000      2.4%   14

2001      5.2%   13

2002      7.8%   12

2003      6.5%   11

2004      6.0%   10

2005      5.6%    9

2006      5.2%    8

2007      3.9%    7

2008      9.4%    6

2009    13.6%    5

2010    15.1%    4

2011    20.9%    3

2012    17.8%    2

2013    18.9%    1

*Rates of return in the table are calculated from September of each year given through September of 2014.

From the above table you can see dramatic growth of the last five years. Those are indeed spectacular returns. But if your eyes move up the table you see that even with these fantastic stock increases, the annual average returns from money invested anytime between 1997 and 2007 yielded below historical averages. Thus even with spectacular growth of the last few years – the longer term returns in the market are well below average.

What do you make of this? The answer is that there is no way to know the future. Price/earnings ratios are interesting but don’t tell the whole story. Returns of the last five years are indeed spectacular. But even with stock price increases in those five years, money that got invested 7 to 17 years ago are not impressive. Stocks could rise several more years before that money earned the average annual return.

Will the market peak soon and swoon? Will it remain at present levels for 10 years? I don’t know. But the answer is clearly not a slam dunk. 

Econo-Quickie: Good News is Now Good News

This is a bit of an experiment today with my blog. Usually I stick to my long and boring Tuesday posting . Today I am seeing how you will respond to an off-cycle quickie. Charles -- no wise cracks.

Anyway, I was taken by the fact that the employment release this morning was strong -- employment grew more than expected and the nation's unemployment rate fell below 6% for the first time since some of you were wearing short pants.

In the recent past such "good" news was taken as a bad sign for the stock market. That's because good economic news might cause the Fed to quit holding interest rates down. And rising interest rates are thought to be bad for the market. But yikes. As I type the market is almost up 1% and some of the talking heads are saying stocks are rising because of good employment  news. So my question to you is -- if good news used to be bad news -- then why is good news now taken as good news?

Aren't we having fun? :-)