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Note from the CIO: When Will the Expansion End? Lessons from History

Post Series: Investment Committee Commentary Q3 2019

The stock market, measured by the largest 500 US companies known as the S&P 500 index, hit an all-time high on June 20. Since the bottom of the financial crisis in early 2009, the index has more than tripled even after adjusting for inflation[1]. This seems to many like an unprecedented market run-up; it is only natural to ask how much longer this expansion can last, when will it reverse itself and is now a good time to be invested in the stock market. But in the words of President Harry Truman: “The only thing new in the world is the history you do not know”.

Our story begins 70 years ago in 1949 (the year my mother was born), a few years after World War II when, serendipitously, President Truman was in office and when the stock market had bottomed out to its lowest point in the post-war era. Over the next 70 years, there have been two major stock market cycles and arguably the beginning of a third which we are currently in, as depicted in this graph:

Exhibit 1. S&P 500 Index, June 1949 – June 2019, Inflation Adjusted

The first major stock market expansion was from 1949 to 1968 when the S&P 500 index multiplied 5.2 times from 152 to 784[2]. The next major bull market was from 1982 to 2000 when the index multiplied 8.0 times from 281 to 2,249. And that brings us to the most recent ten years during which the index multiplied 3.3 times from February 2009 through today, June 2019. So, from this historical perspective, the stock market climb since 2009 is not unusual. As for the concern over an all-time market high, on average since 1927, the S&P 500 index has reached an all-time high about 1 in every 20 trading days, or about once per month.

Exhibit 2. Summary of S&P 500 expansions since World War II

Expansion period Years of expansions Growth of the index
June 1949 – November 1968 19.5 years 5.2 times
July 1982 – August 2000 18 years 8.0 times
February 2009 – June 2019 10.5 years 3.3 times

 

This does not suggest that the current expansion cannot end soon and abruptly. At any time in history stock market investors have faced risks, and they are in no short supply today. Tariffs can slow down the global economy if not the US economy; uncertainty around breaking up the big-tech companies exacerbates the jolting up-and-down swings in stock prices; Federal Reserve decisions appear to be based on subjective standards and completely reverse themselves within periods of only a few months; loosening mortgage lending standards (again) combined with incentives to promote homeownership (again) could result in a similar situation we found ourselves in during the Financial Crisis of 2007-2008. Sir Winston Churchill (a contemporary of Harry Truman) was known for saying “Those who fail to learn from history are doomed to repeat it.”

Setbacks are inevitable, but all setbacks in the stock market have historically been temporary. There have been 14 “bear markets” (defined as a drop of roughly 20% or more in the S&P 500 index) over the past 70 years, some of which are difficult to see in the graph in Exhibit 1 and most of which occurred during the major expansion periods. What matters most is the way we will react (or not) to the setbacks that are to come. The key is to take action before the setbacks occur by having the appropriate mix of stocks and bonds to reach the goals in your financial plan, regardless of market volatility. This approach allows you to take advantage of the dips when they come (by rebalancing) and thereby enjoy more of the growth that occurs after those dips. Abacus advisors help our clients accomplish this by aligning their investments to their goals, values and risk tolerance. If you’re still investing based on “high” or “low” markets, let us show you another way.


[1] Ignoring the adjustment of inflation, the index has more than quadrupled.

[2] All index values here are adjusted for inflation to be in today’s dollars. In addition, we are using month-end index data and stock dividends are not included in the index value.

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