S and P 500: The Lost Decade

We're now over eleven years beyond the S&P 500 2000 high. This little charting exercise gives credence to the frequent reference to a "lost decade" for investors. In nominal terms, the index is about 6.8 percent below where it was at the 2000 peak, but in real terms, it's a disappointing 29.5 percent off the original investment. The chart also offers support for the wisdom of diversification across asset classes ... and perhaps the value of active management during secular bear markets.

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S and P 500: Bulls and Bears

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Wealth Effect

You might expect Fed chief Ben Bernanke to laud QE2 because of its effect on stock prices: Easy money fuels the “wealth effect”… people feel flush as their brokerage accounts grow… and then go out and spend money.

Of course, it’s a dopey notion — based on the idea that consumption grows the economy, not savings and production. But it is what it is.

At yesterday’s close, the S&P 500 is only 70 points away from where the whole QE2 process started nearly a year ago — when Bernanke winked and said it was all but a done deal during his annual speech in Jackson Hole, Wyo.

When Bernanke indicated during his first news conference on April 27, 2011 that QE2 would wind down as scheduled at the end of June, the market topped two days later. The market then entered a holding pattern until the circus over the debt ceiling concluded… then, well, the last week of July through this morning tells the rest of the story.

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Fear Gauge

n the wake of “Great S&P Downgrade” volatility in the stock market as measured by the VIX — the volume of S&P 500 index options — jumped 50% yesterday.

The market’s “fear gauge” closed out the day at 48...

Going back to its inception in 1993, there are only five other episodes in which the VIX topped 45:

• September 1998: Russian default
• October 1998: Long-Term Capital Management (LTCM) implosion
• August 2002: WorldCom collapse
• September 2008: Lehman Bros. bankruptcy and ensuing Panic of ’08
• May 2010: The incestuous “flash crash.”

In four of five of these spooky episodes, you could have done very nicely for yourself buying the Dow 30 as soon as the VIX topped 45… and holding those shares for a year. The blue chips picked up between 1,500-2,500 points each time.

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The S & P 500 and Federal Reserve Intervention

If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke's speech at the Fed's 2010 annual symposium in Jackson Hole, Wyoming. Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initiated in November, namely, the second round of quantitative easing, aka QE2.

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Cartoon: S and P

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S and P 500 and QE

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Current Market: S P 500

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S and P 500

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S & P 500 P/E Ratios

Interestingly, in 1981 the stock market was in a kind of a funk and the Price/Earnings ratio was hitting about 7, which is on the low side, whereupon (thanks to Congress authorizing tax-deferred retirement accounts in 1982) the stock market proceeded for the next 20 years or so, in fits and starts, to rise to, stunningly, a P/E ratio of almost 30 in 2000, whereupon it promptly turned over and has been falling, in fits and starts, for the last 10 years as the price of the S&P went down. Wow! What a ride!...

I say this because the historical record is crystal-clear: When the P/E ratio goes above 22 or so, it won’t be long until the price of the stock falls enough so that the Price/Earnings ratio is back down in the upper teens in a bull market, and back down to around 5 in a severe bear market, whereupon it won’t be long until the price rises again on its way to “overvalued” status. That’s the nature of cycles...

And, with special emphasis to in-laws everywhere, anyone buying a broad basket of common stocks and bonds, but not buying gold, silver and oil to protect themselves against the roaring inflation in consumer prices that will result from an idiot Federal Reserve creating massive amounts of money so that the government can deficit-spend those massive amounts of money, is a moron.

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Four Bears

The August 6th S&P 500 close is the final data point for the Four Bad Bears chart. The timeline was established by the length of the 1929-1932 Dow crash, and today we reach the equivalent point following the S&P high of 2007.

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S & P 500: Current Bear Market

Current Bear Market

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S and P 500 Monthly Performance

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Current Bear Market

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A Turn Around For the S&P 500?

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12 Year Lows for the Stock Market

Stocks tumbled Friday on worries about the government taking a bigger chunk of Citigroup and a bleak reading on the economy, again touching 12-year lows.

The Dow Jones industrial average (INDU) lost 119 points, or 1.7%. It was the lowest close since May 1, 1997.

The S&P 500 (SPX) index lost 18 points, or 2.4%, closing at its lowest point since Dec. 18, 1996.

The Nasdaq composite (COMP) lost 13.5 points, or 1%.

S and P 500 and Headlines

Label Date WSJ Lead Headline
1 6/3 Obama Clinches Nomination.
2 6/7 Markets Slammed by Oil, Crude Leaps Nearly $11.
3 6/10 Big Loss At Lehman Intensifies Crisis Jitters.
4 6/11 Inflation’s Bite Worsens Around World.
5 6/21 Ford Reels as Truck Sales Plunge.
6 6/28 Dow Hits Bear-Market Territory.
7 7/12 Crisis Deepens as Big Bank Fails: IndyMac Seized In Largest Bust In Two Decades.
8 7/14 Treasury and Fed Pledge Aid For Ailing Mortgage Giants.
9 7/16 SEC Moves to Curb Short Selling.
10 8/11 Russia Widens Attacks on Georgia.
11 9/8 US Seizes Mortgage Giants FNM and FRE.
12 9/15 Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash.
13 9/17 US To Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up.
14 9/20 US Bailout Plan Calms Markets, But Struggle Looms Over Details.
15 9/22 Goldman, Morgan Scrap Wall Street Model, Become Banks in Bid to Ride Out Crisis.
16 9/26 WaMu Is Seized, Sold Off to JP Morgan, In Largest Failure in US Banking History.
17 9/30 Bailout Plan Rejected, Markets Plunge, Forcing New Scramble to Solve Crisis.
18 10/4 Historic Bailout Passes As Economy Slips Further.
19 10/14 US to Buy Stakes in Nation’s Largest Banks.
20 10/23 Markets Fall as Fears of Slump Span World.
21 10/28 Crisis Deals New Blow to Japan: Stocks at ‘82 Levels.
22 11/5 Obama Sweeps to Historic Victory.
23 11/19 Big Three Plead For Aid.
24 11/24 US Agrees to Rescue Struggling Citigroup.
25 12/12 Top Broker Accused of $50 Billion Fraud.
26 12/17 Fed Cuts Rates Near Zero to Battle Slump.
27 12/29 Israel Pounds Gaza Again, Signals More on the Way.
28 1/3 Manufacturing Tumbles Globally.
29 1/8 Corporate Scandal Shakes India.
30 1/10 Citigroup Takes First Step Toward Breakup.
31 1/15 Bank of America to Get Billions in US Aid.
32 1/21 President Barack Obama.
33 1/23 Thain Ousted in Clash at Bank of America.

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Stock Market Volatility

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2008 Winners and Losers

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