The really big picture

December 31, 2012No Comments

Doug Short, VP of Research for Advisor Perspectives (www.advisorperspectives.com) posted an interesting chart recently that focused on the long-term trend of the S&P500. The chart shows the real price growth of the S&P excluding inflation and dividends. Mr. Short has drawn a linear regression channel on the chart. The middle line, which is the linear regression line, effectively gives a straight-line reference point that approximates all the individual price levels for the S&P500 over the 141 years shown. The upper and lower channel lines are drawn parallel to the regression line – in this case Mr. Short has drawn them to account for the extreme high points and low points relative to the regression line over the period studied.

 

As you will note on the chart, the S&P500 has tended to overshoot to one side of the regression line or the other. For example, a typical bear market correction has brought the S&P anywhere from 34% to 67% below the regression line.  The latest bear market brought the index only 10% below the regression trendline in March of 2009 – substantially shallower than prior bear movements. Mind you, the peak of the last bull market in 2000 was 154% above the regression trendline – substantially ahead of prior peaks (which ranged from 13% – 84% above the trend). Perhaps the 2009 low was not enough to correct the excess returns created during the 1982 – 2000 bull market. Before you sell all of your stocks and run for the hills, Mr. short has done further research – noted on the website mentioned above, that might suggest a potential double for the S&P500 by the year 2020. So which is it—a bear market crash, or a new bull market? Only time will tell.

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