Long-term Market Performance: It Sure Ain't What You Thought !
There's a couple of things going on that caused us to dig into long-term market performance, using the SP500 as a proxy. The big one, which'll we'll dig into shortly, is it's earnings seasons and we anticipate a large dose of cold water in the face as reality meets the analysts. A different and surprising tack is how does the current market compare to long-term performance trends. Oddly we were led to that by all the hoorah about Citi's performance where Weill has been claiming sanctity because he generated such wonderful performance. That turns out to be even more ill-founded than future earnings outlooks. But in the process we stumbled across some perspectives we thought worth sharing. So we're going to start with a short-term lookat the SP500 but follow up with some very long-term ones back to 1950.
If you'll take a gander at the busy little chart at right (we apologize for the business if it's too excessive but wanted in this case to take advantage of some tools). In prior posts we talked about the steps and stumbles as the market gradually worked its' way down the staircase of the credit crisis and associated realities. If you look at the base chart you'll notice, among all the information, that the 50-day MA was still pulling away from the 200-day but has recently flattened. Driven largely by (our alternate title) April Fools where UBS doubled its' writedowns another ~ $19B but raised capital ! Sheesh. We don't want to spend immense time here but notice the flags and pennants. As we mentioned we saw three forming. The last two got busted to the downside but 4/1 saw the upside "surprise" all the bottom-callers were looking for. Which seems to be coming under pressure. Whether the rally holds will depend on how views on earnings evolve. But let's shift gears a LOT and look at real market performance over the long-term.
Below you'll find charts dissecting long-term market performance and returns in four different ways going back to 1950 and some, we think, very surprising conclusions. Our bottomline is that the era of highest performance was the '50s and early '60s. And that performance was driven by huge increases in economic performance which are unlikely to come again. But take a look for yourselves.
Adjusted/Indexed Performance
Since we wanted initially to compare Citi to the SP500 we normalized the prices to a common base period, in this case Jan95. And boy were we surprised at what started showing up. So we further adjusted the SP index for inflation. Now our math may be a little suspect and we invite critique but the chart appears reasonable. Here you see the SP500 on a normalized base compared to that same base adjusted for inflation. The WSJ made headlines by recently pointing out that in 10 years the return has been essentially zero. Well the bad and sad news is that it would actually appear to be negative. In fact significantly negative. The scary part though was looking at the kickedup "bubble" that began in '95 - did something change so fundamentally in the economy that 45 years of prior performance went out the window ? Now that's an interesting question indeed !
To help you see that issue a little clearer we used a logarithimic scale in this second chart. And it's even more interesting. We took the same data, logged the scale and then added some trendlines. The dark blue dotted line is that trend on the unadjusted SP500 while the lighter blue dotted line is for the adjusted. Again you can see the SP500 (unadj.) jumping to a whole new deep trend which, given we drew it between endpoints, persists even with the adj. data. Since we didn't recall interstellar visitors reaching the earth in 1995 and changing the entire tech base and productivity of the economy that seemed a bit "challangeable" to us. So we drew in the standard trading channel trend lines (the yellow and red) to see where we might have been if normality had continued.Our conclusion so far is that what we're looking as is the remnants of a stock nova that have stayed around just like the dust clouds of real nova do. In other words we have yet to adjust the long-term growth potentials of the economy. Or conversely there's been so much liquidity that stocks have been greatly bid up over structurally defensible prices.
Long-term Return Performance 
Which naturally in our minds raises the question of long-term market returns. Here we took the inflation-adjusted and normalized SP500 and compared it to YOY% returns from 1950 to now. If you'd imagine a simple linear trend line the central tendency for long-term performance in real terms looks to us like it's about 7-8%. What do you think ? Of course there's a lot of noisy fluctuation around that long-term trend but for the life of us we don't see anything that looks like real returns much over that. Which ought to factor into everybody's investment analysis and planning IOHOs.
Just to take a complementary view we also took a look at monthly average returns, calculated 1950 to date, and annualized
them to see what we could see. And those results are perhaps the most interesting. Especially when you map them against long-term trends in the economy. Here it looks to us as if the rate of return is higher but shows some very distinct patterns as well. And one that jives with the recieved tribal wisdom in the investment community. The decade of the '70s wasn't very good. But then neither was that of the '80s - surprise, surprise. We got the aberrational late '90s of course. With the same aforementioned recent significant structural deteriorations.In fact, and it'll take a long-time for this to play out, but it looks like we're beginning to work our way back down. The very most interesting thing is that the era of the best real performance was the '50s and the early '60s. Back before we squandered our "economic fluids" (cf. Dr. Strangelove) on guns, butter, wild schemes and inflation. In fact what this last chart appears to tell us is that when the economy was the healthiest in terms of job growth, new products and industries, and overall improvements in the wealth and well-being of the entire populace so was the market.
Which suggests two things to us. First our most fundamental economic policy goal ought to be return to those halcyon days of yore. And that that'll be difficult at best, very difficult. And second, the kind of return performance is unlikely to return until we get ourselves back on the same sound footing. Which we haven't seen and are unlikely to see for a long while, if ever.
And we won't see it if we don't find the Next Big Thing. Remember post-WW2 America saw the largest mass migration into a well-off middle class in human history. And that migration was driven by new job creation due to new industries in Pharmaceuticals, Materials (Plastics - cf. Mrs. Robinson), Technology (Computing and Consumer Electronics) and Transportation (the interstate system). Along with the gov't funded R&D from the war, the carryover capital and the huge shift in human capital due to the GI Bill.
If we'd like to see those days of prosperity again that sounds like the strategic plan. Now how realistic is it ? Not very we think.