A Long, Strange Trip: Market Goes Absolutely Nowhere Over 3 Years

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You may have noticed this already, but the S&P 500 finished at the same level that it did exactly three years earlier on Monday. That's the day President Bush signed the $700 billion financial bailout bill into law. And when I say "finished at the same level," I mean, exactly the same price, down to the last two decimal places.

In fact looking over the last four years, the market hasn't really moved much at all from one year to the next, has it?

Oct. 3, 2011 1099.23
Oct. 1, 2010 1146.24
Oct. 2, 2009 1025.21
Oct. 3, 2008 1099.23
(Oct. 3 fell on a weekend in 2009 and 2010.)

In fact, if you play with the dates just a tiny, tiny bit, you can make the market look even more humdrum over that time period. Voila:

Oct. 3, 2011 1099.23
Sept. 8, 2010 1098.87
Oct. 15, 2009 1096.56
Oct. 3, 2008 1099.23

Now, Do These Numbers Mean Anything?

Well, in the hands (or better yet, mouth) of a trained financial pundit, they could be made to sound like something meaningful. A recent cartoon plucked by Nate Silver from the clever web comic XKCD for his wonderful "538" column in The New York Times shows exactly how.

The cartoon by Randall Munroe bears the caption "All Sports Commentary," and it is, for those of us that fancy ourselves as Moneyball-esque amateur sabermetricians, hilarious: Two stick men, apparently TV sports commentators, sit behind a desk; the first one says, "A weighted random number generator just produced a new batch of numbers," to which his stick friend/co-host replies, "Let's use them to build narratives!"

It could just as easily have been called, "Too Much of Stock Market Commentary."

Let's Write a Narrative!

If you want to come up with a narrative about why stock market valuations are at exactly the same point they were the day the bailout bill was signed -- and roughly the same spot as the nearest market date in the two intervening years -- go right ahead. Here, try this out for size.

CNN reported on that day, "Federal Reserve Chairman Ben Bernanke said he welcomed the news. The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses."

Say what you want about Bernanke, but, man, did he nail that one or what? Have the markets ever been so stabilized as they must have been over the past three years looking at the numbers above?

Of course, such a narrative ignores the spectacular volatility in the meantime, which saw another 35% plunge from the October 2008 level, the market doubling from there, and coming back down 20% afterwards.

If you want to ignore all that narrative, it's just as easy to create another, like one about the utter failure of the bailout bill to produce any positive results in the market to date. Pick your economic or political opinion, pick the numbers on the right days that support your point, and you're good to go.

Here's a Better Narrative for Investors

Right now, on a daily basis, the market is much more defined by its excess volatility, rather than an utter lack of it (which the above numbers distortedly imply). But neither great volatility nor the lack of it strongly correlate with what a long-term investor is likely to gain from making investments in the market.

Those gains (or losses) are more or less determined by keeping your costs low in two dimensions:

  • Buying stocks when the market prices earnings cheaply
  • Keeping investment trading and management costs low

As of yesterday's close, assuming projected quarterly earnings come in around analyst expectations for the third quarter, the S&P 500 is trading at a price/earnings multiple of 12.5, the lowest trailing multiple for the market since mid-1989 and lower than its long-term average of about 15.

What happens if we have another recession? Consider this: Following the mid-1989 point, the country was hit with a recession in 1990-'91. S&P 500 earnings declined over each of those years, yet the market (with some volatility, of course) moved up mildly. More importantly, investors experienced better-than-average historical returns over the following decades.

Better-than-average historical market returns (which, remember, are 6.5% after adjusting for inflation and before adjusting for costs) are by no means assured merely by finding times when the market is trading at a below average multiple to earnings. But your odds do improve under those conditions. And there are certainly worse narratives out there today than that one.

Bill Barker is a senior analyst for Motley Fool Asset Management.


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48 Comments

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mjhoevel

I love all the hype about the last three years. A real eye opener is that the S&P was at 1342.55 on Jan. 19, 2001, just before Bush took the oath of office. The S&P was at 850.12 on Jan. 16, 2009, just before Bush left office eight years later. What can we infer from that?

October 31 2011 at 6:06 PM Report abuse rate up rate down Reply
clindroth

With investor confidence gone, unregulated High Frequency Short Sellers can manipulate the market down at will for their profits. This is not going to change until changes are made to regulate them. With the economy in the shape its in, this could take many more years. See www.mainstreetinvesting.biz for solutions. Cliff Lindroth

October 20 2011 at 4:03 PM Report abuse rate up rate down Reply
nobarrynmochell

Our government has very systematically and intentionally devalued the dollar for many years now. This devaluation of our currency has had much to do with the so called financial melt down. Our future is not going to be bright again until our debt and entitlements come down. Our ability to pay our own bills is getting harder because of inflation and the loss of purchasing power. Just look at two industries, health care and education. These areas are so expensive that we cannot afford them, yet our government continues to insist that they know how to run them. This administration wants us dependent upon them...not ourselves. This country will not have a future with such large and intrusive government. Financial equality is what Cuba has. Almost all people are poor in Cuba and if we continue with our current leadership, we too will look more and more like Cuba. We have lost our AAA rating and there will be more downgrades for the US. Our government cannot pay off it's debts without inflation, this is why they tell us that deflation is bad. If you do not owe any money, then why would lower prices hurt you? They won't. Our failure has been in government, not our business community. Giving them more of our money will create more poverty. We pay more to them now than in 1965 when Lyndon Johnson started his great War on Poverty, yet poverty is greater today. Stop their addiction to debt and their lying ways.

October 12 2011 at 7:23 AM Report abuse rate up rate down Reply
LL

"They will not be able to Buy or Sell" ( in Biblical reference to The End Time ) is all that this report supports, but who listens to God's Word anyway ? But, on October 21st, ( YES, this month ) every knee shall bow & every tongue confess, that Jesus Christ is Lord - and "uniquely enough" if one were to ( rightfully ) adjust the Gregorian Calendar, even the Mayan Calendar "PREDICTION" lands us smack on October 21st, 2011 - for whatever that is worth to anyone who is dragging their feet in squaring things away with God. May 21st was INDEED Judgment Day, where every soul was judged in preparation for 10/21/11 and now we wait, .......for the revelation of the Sons of God.

October 05 2011 at 3:31 PM Report abuse rate up rate down Reply
RXTOXICWASTE

Market went nowhere for three years??? Isn't that when Obama took office??? Strange coincidence!!!!

October 05 2011 at 3:10 PM Report abuse rate up rate down Reply
1 reply to RXTOXICWASTE's comment
itacurubi

Th4e market lost 25% or so during the eight years of the Bush Administration. It is up more than a third since the day Obama took office.

October 07 2011 at 10:39 AM Report abuse rate up rate down Reply
bblond88

THE MARKETS NOWHERE IN 3 YEARS? REMINDS ME OF THE OBAMA ADMINISTRATION-

October 05 2011 at 1:48 PM Report abuse rate up rate down Reply
leandercannon

pick any number.......that how the market work's and you pay to buy and sell 3 billon share a day.......lc

October 05 2011 at 1:09 PM Report abuse rate up rate down Reply
Jay

This proves beyond any doubt that Obama and his policies lead nowhere. We need a new president!

October 05 2011 at 12:40 PM Report abuse +2 rate up rate down Reply
wfreeberg

That's based on the S&P. If you look at the DOW it moved from the mid 6,000s in 2009 to the 12,000s in 2011; that is before this latest bump in the road.

October 05 2011 at 10:58 AM Report abuse rate up rate down Reply
1 reply to wfreeberg's comment
d1029nj

Clinton's DOW hi was 12,500........ BUSH';s DOW hi was 14,200 until it's collapse in 2006. What happened in Nov 2006? O that's right, the Democrats took control and at the same time the Dow took a ****, unemployment went from Bush's 5.5 to 7.2% and now up to it's infmaous 9.1% where it will stay until 2012

October 05 2011 at 11:56 AM Report abuse +2 rate up rate down Reply
Gumby

It doesnt look good for Warren Buffet 's idea of buy and hold.... We have to trade more often ... Warren Buffet had it so easy back then.. It is very different now... Warren Buffet is not goin gto make money again...

October 05 2011 at 10:22 AM Report abuse +2 rate up rate down Reply
1 reply to Gumby's comment
leandercannon

buffet put down 5 billion for a special issue of BOA to pay 7% and with warents to buy more at a
fixed price........

October 05 2011 at 1:23 PM Report abuse +1 rate up rate down Reply