Good Friday Update -- Annoying Sideways Market

A Short Historical Perspective of the US Stock Market

Those who “play” the stock market as if it were a game will lose. Those who respect it as a force of nature will prosper, but only as long as they are humble and patient. – Jason Zweig author of The Devil’s Financial Dictionary.

To state that currently Stock Markets have been volatile is an understatement given recent market gyrations. But it is essential to understand the nature of the Stock Market beast. Given that this year 2016 started with a great deal of selling resulting in lower levels, every Stock Market cliché came into vogue. “As goes January so goes the Year” otherwise known as the January effect. The Bull market of Seven years is long in the tooth and tired; Leap years are volatile, Election year cycles are brutal and there was no end to such hand wringing. For the record the Stock Market had Year to Date losses of about 11.4% on Feb 11 2016 based on the broad S&P-500 Index.

 
The above chart gives the progress of the S&P-500 Index for slightly more than a year, covers the entire calendar year 2015. As of “Good Friday” March 25 2016 the Index closed at the value 2035.94. A year ago the index closed at a value of 2061.02. Hence one could state that the Stock Market has lost 1.6% over the past one year. The small loss of 1.6% does not convey the degree of volatility which the markets endured, as illustrated by the above graph. Thus we are in the midst of an annoying sideways market. Further the Linear Trend Line in the graph otherwise known as the “Line of Best Fit” is trending downwards indicating the negative sentiment currently prevailing in the market.

At any point of time there are several trends prevalent within the Stock Market; there could be a three month trend (short term trend), a six month trend (medium term trend) and a yearly trend (long term trend). It needs to be noted that all the three trends need not be in the same direction. The trends could be measured in several different ways, the simplest being the absolute performance during a given time period. However absolute performance depends on just two values of the start date and end date. The market loss of 1.6% during the past one year masks the fact that there was a great deal of volatility during that time period. 

Another way to estimate trends is by using a simple moving average of the Index value over a defined time period. For example the 200 Day Moving Average value of the S&P-500 Index as of March 25 was at 2016.99. So currently the S&P-500 Index at 2035.94 is trading at a value higher than the average of the past 200 days. The usage of 200 Day Moving Average eliminates the problem of using only two values but introduces other issues like extreme values which could skew the averages.           

In order to get a handle of the Stock Market movements and volatility, it might make sense to view the Stock Market performance over several years. Fortunately historical data on Stock Market performance is readily available, which allows us to examine the nature of the beast.

Stock Market in 2008 … Bear Market 

Let us rollback the videotape to the year 2008, which was a watershed moment world-wide. The US Stock Market as represented by the S&P-500 Index in 2008 had severe losses to the tune of 38.5 %. We can view the historic meltdown in the following graph.

  
The above graph clearly shows the steep decline of the Stock Market during the year 2008 and it spilled over during the initial months of 2009 as well. This meltdown was definitely a Bear market wherein almost all stocks took huge losses, nothing was spared.

Stock Market in 2009 … Start of a New Bull Market 

If 2008 was the year of the Bear, the following year saw the early stages of recovery and the establishment of a new Bull market. The S&P-500 Index after an initial sell-off during the first two months started to recover and ended the year being up by 23.5 %. We can view the start of the recovery in the following graph.

The above graph clearly indicates the beginnings of a new Bull market. Though the Stock Market rose by 23.5 % in 2009, it was still way down from the Stock Market highs established earlier in 2007.

Stock Market in 2011 … A Flat Year within a Bull Market 

The year 2010 saw the continuation of the Bull market with a rise of 12.8 %. However the year 2011 saw challenges to the Bull market. It saw elevated levels of volatility. The S&P-500 Index after an initial run up during the first four months started to sell-off rapidly by October 2011. It appeared that the Bull market was over with double digit declines, but the Stock Market reversed course and ended the year unchanged from the beginning.

The above is a typical example of a flat year with great deal of volatility in between. The overall performance of the S&P-500 Index during 2011 was 0% but during the year there were losses to the tune of 18%. A new era of volatile flat markets was born. It needs to be kept in mind that during this current Bull market there have been corrections of at least 10% during the years 2010, 2011, 2012, 2015, 2016. The upward movement of the Stock Market since 2009 has come with quite a few bumps.

Historical Performance of the S&P-500 Index since 1950

Decade	0	1	2	3	4	5	6	7	8	9
201X	12.8%	0.0%	13.4%	29.6%	11.4%	-0.7%	-0.4%
200X	-10.1%	-13.0%	-23.4%	26.4%	9.0%	3.0%	13.6%	3.5%	-38.5%	23.5%
199X	-6.6%	26.3%	4.5%	7.1%	-1.5%	34.1%	20.3%	31.0%	26.7%	19.5%
198X	25.8%	-9.7%	14.8%	17.3%	1.4%	26.3%	14.6%	2.0%	12.4%	27.3%
197X	0.1%	10.8%	15.6%	-17.4%	-29.7%	31.5%	19.1%	-11.5%	1.1%	12.3%
196X	-3.0%	23.1%	-11.8%	18.9%	13.0%	9.1%	-13.1%	20.1%	7.7%	-11.4%
195X	22.6%	16.3%	11.8%	-6.6%	45.0%	26.4%	2.6%	-14.3%	38.1%	8.5%

The above table gives the performance of the S&P-500 Stock Index on a Yearly basis with each row representing the appropriate decade. It is worthwhile to note that the 1980s and 1990s saw twenty years or rather twenty two years where there were no double digit declines in the Stock Market. Whereas the subsequent decade in the new century saw four such instances of double digit declines. Hence keeping a long term perspective is essential to investing successfully in the Stock Market.

Given current market conditions of an annoying sideways trend or lack of a trend, the investing outlook has to be one of caution. The challenges ahead are primarily Federal Interest Rate direction, Corporate Earnings growth, and Global Economic Outlook. Based on how future market events unfold, one will have to make appropriate course corrections either to avoid severe damages (like in 2008) or to be ready for the next leg of the Bull market.