One year ago, on March 9, 2009, the stock market began a rally that has led to a total return of 72% for the S&P 500, through the end of last week. As we reach this anniversary it is worth taking a look back at the powerful rally that has unfolded and seek clues as to what may lie ahead as the rally reaches a mature stage.
The stock market rebound has been broad and ranged across all sectors, sizes, and regions of the globe. Even the troubled stock market in Greece is up about 56% in U.S. dollar terms, and 46% in Euros, over the past year, as measured by The Athens Stock Exchanged General Index. Other markets have posted gains, as well. Over that same period, commodities are up 33%, measured by the Commodity Research Bureau (CRB) Commodity Price Index. The bond market, measured by the Barclays Aggregate Bond Index, is up about 9%. In the bond market, losses in intermediate and long maturity government bonds were in contrast to the stock market-like gains delivered by lower-quality corporate bonds over the past year.
While the powerful 72% total return including dividends (68% price only rise in the index) lasting a full year was very strong in historical terms, it pales in comparison to the devastating decline that took the S&P 500 from 1565 on October 9, 2007 to a low of 677 a year and a half later. The S&P 500, now at 1139, has only recovered about half of the losses.
The combination of improving credit markets, the return of economic and profit growth, and demand from overseas investors has sustained the rally over the past year. As you can see in the nearby chart, the S&P 500 closely tracked the path of the LPL Financial Current Conditions Index (CCI), which measures the conditions for the market and economy, over the past year as it has steadily moved from a negative environment to one that fosters growth.
We expect that the CCI may weaken in the latter half of 2010 to reflect an environment of slow growth. The global tailwinds for growth created by massive government stimulus may begin to fade or even give rise to headwinds in the second half of the year (we presented our outlook for this transition most recently in the February 16, 2010 Weekly Market Commentary entitled The Winds of Change). Our outlook leads us to believe that the slower pace of growth may now begin to slow the rally and contribute to the return of volatility in the stock market.
In fact, this is precisely what history tells us is likely to happen. Over the past 40 years, recession-related bear markets ended with strong stock market rallies that lasted until their first anniversary. In their second year, the rallies flattened out and became more volatile providing modest gains punctuated by multiple 5-10% pullbacks.
Over the past 40 years, there have been four recession-related stock market declines in excess of 20%. The rallies that followed these bear markets began following the close on:
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- March 26, 1970, after a 36% decline
- October 3, 1974, after a 48% decline
- August 12, 1982, after a 27% decline
- March 11, 2003, after a 49% decline
It is helpful to review these in reverse chronological order and compare them to the performance of the S&P 500 following the end of the latest recession related bear market.
As you can see in the chart, the S&P 500 in 2009 and so far in 2010 looks a lot like it did in 2003 and 2004. The powerful rally from the March lows may be beginning to take a more volatile path, as did the rally in 2004 after it reached the first anniversary.
The comparison of the 2009-10 stock market rally to the rally in 1982-83 reveals a similar path for the first year, equivalent to about 250 trading days that led to a return of volatility once the first anniversary passed and the The stock market in 1970-71 and 1974-75 also reflected the return of volatility after the powerful rallies began to mature near the one year anniversary of the bear market low point.
After one year, the S&P 500 is up about 70%. Happy Anniversary? Not entirely. Of course, it is good to have recouped half of the bear market losses. However, the next year is unlikely to be anywhere near as rewarding as the past one if our outlook for a transition from tailwinds to headwinds unfolds and if history repeats itself as the one-year anniversary of the current rally passes.
- This research material has been prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you,
- consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
- Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability.
- Stock investing involves risk including loss of principal.
- Small-cap stocks may be subject to higher degree of risk than more established companies’ securities. The illiquidity of the small-cap market may adversely affect the value of these investments.
- Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
- The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
- There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
- The Commodity Research Bureau (CRB) Commodity Price Index tracks the price movements of 17 commodities.
- The CRB index does not follow any one commodity sector, but rather the general direction of commodities overall. The CRB index is watched by both commodity and bond investors because the prices of commodities and bonds tend to move in opposite directions due to inflation.
- Barclays Aggregate Bond Index: This index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
- The fast swings of commodities will result in significant volatility in an investor’s holdings.
- The Athens Stock Exchange General Index is a capitalization-weighted index of Greek stocks listed on the Athens Stock Exchange. The index was developed with a base value of 100 as of December 31, 1980.