S&P 500 +3% Days During The Bear

Yesterday was the 26th day that the S&P 500 has gained more than 3% during the current bear market (started 10/9/07).  For those interested, below we provide the change on the day following these 3%+ days.  Of the 25 prior 3% days, the S&P has gone up the next day just 32% of the time with an average change of -0.51%.  However, the last two 3% moves (both during the current rally) have seen positive returns the next day.

Back to the “Bear”

Even though no one really considered the rally from the November lows to the early January highs as a new bull market, based on the standard bull market definition of a 20% rally that was preceded by a 20% decline, it was one.  Well, we don’t have to worry about the bull market anymore since we’ve had another 20%+ decline since then.  This puts us back into bear market territory.  When we’re in a full-fledged global market decline like the current one, the 20% bull and bear market definition is really just semantics.  Even though we had a brief “bull” since the market peaked on October 9th, 2007, the S&P 500 is now down a depressing 54% from its highs.  Michael Santoli puts the declines into context in his commentary in the most recent Barron’s:

Some very long-term landmarks are in sight. Right below Dow 7000, not 2% down from here, is a point at which half of the entire rise from the 1932 Depression low to the ultimate October 2007 high will have gone away. That’s explainable given the low-double-digit Dow of ’32, but losing half of 75 years worth of upside in 16 months is . . . quite something.

That sounds bad, and it is, but you can pick any low from any start date in history and a 50% decline from an all-time high will mean at least half the gains have been erased.  If you’re down 50% from a high, you have erased half of the gains in the entire history of the Index.  In this case, since 1884.  Regardless of where you start, losing half of the market’s gains makes you cringe (unless you have a lot of cash and you have never been invested in stocks.)

Source: Bespoke Research

Financials Wipeout

In the first chart below we highlight a ratio of the S&P 500 to the S&P 500 Bank group going back to 1940.  When the ratio is rising, the financials are getting weaker relative to the S&P 500 as a whole.  As shown, the ratio is currently as high as it has been over the entire time period, meaning the banks are as small as they’ve been relative to the overall index.  Where we go from here, nobody knows, but the financials are pretty much getting wiped off the investment map.

Below we highlight the percentage declines from peaks of various asset class busts in the last decade.  Prior to the declines that financials, oil, and homebuilders are seeing currently, the only recent comparison for the current generation of investors was the Nasdaq bust from 2000-2002.  As shown, the Nasdaq went down 78% from its March 2000 peak to its October 2002 low.  Following the bursting of the Internet bubble, many investors didn’t think they’d see a similar bust for decades.  But the current declines in financials and homebuilders have now eclipsed those of the Nasdaq, and oil has also gone down just as much. 

Oil’s decline of 77% from July 2008 to its low in December was the fastest bust of the group, while homebuilders have gone down the most and for the longest period of time.  Since July 2005, the homebuilders are down a whopping 87%!  And the S&P 500 Financial sector is down 81%, which isn’t as bad as the homebuilders, but given the fact that it didn’t go up nearly as much as the homebuilders, it’s probably worse.

Source: Bespoke Research

A Look At 10-Year Market Returns

The New York Times published an article this weekend highlighting that the current 10-year stretch that ended last month was the worst for the S&P 500 in at least the last 82 years.  The Times looked at total returns for the S&P 500, and below we provide a similar analysis of the 10-year rolling price change of the Dow Jones Industrial Average going back to 1910.  As shown, there have only been four other periods where the 10-year return has been negative, and three of the four periods saw returns float around the negative to flat line for quite some time.  While it may have taken ”buy-and-holders” a few years to end up making money if they got in early when the 10-year returns went negative, they did end up making money.

When looking at 10-year returns, however, where the market was 10 years ago is just as big of a factor as where it is now.  Ten years ago, the market was just about to hit the peak of the Internet bubble, and once it burst, the 10-year return was destined to take a big hit right about now. 

Below we highlight a hypothetical 10-year return chart going out to 2012 if the Dow were to stay right at its current level.  As shown, the return would continue to get negative and drop all the way to -29.49% in January 2010 before finally starting to head higher.  And even if the Dow stayed the same, it would end up turning positive again by late 2011, since the market had fallen so much by late 2001.  If the market gets worse in the next couple of years, the 10-year returns are going to get worse.  But even if the market heads sharply higher from here, the 10-year returns will still be negative to flat until we get past 2010.

Source: Bespoke Research