Call it the little engine that could … the S&P 500 Index (SPX) huffed … and it puffed.
And on the last trading day of March, the blue-chip index finally made it to a new record high last week, eclipsing the previous high-water mark of 1,565 set back in the pre-financial crisis days of 2007.
But the blue-chip index is very late to this stock market party. And by a more important measure, it’s not even close to setting a record, so hold the champagne.
Indeed, the S&P 500 Equal Weight Index, which measures component stocks on the same footing, rather than by market cap, notched new highs in 2012. So did the Nasdaq Composite Index, and the Russell 2000 Index of small-cap stocks.
Even the stodgy Dow Industrials made it to new highs in early March. So in spite of all the media hoopla, the S&P 500’s milestone seems a bit anticlimactic.
And when measured in purchasing-power terms, you’ll find the S&P is nowhere near its 2007 peak, let alone its “real” high from 2000.
The Only Real Way to
Measure Your Wealth
In real terms, once you adjust for inflation, the S&P 500 Index must reach 1,724 in today’s depreciated dollars, just to equal the 2007 high; still 9.7 percent away, as shown in the chart above.
But even this level is merely a mid-point along the way back to the real (inflation adjusted) all-time high of 2,012 for the blue-chip index set back in August 2000. Another 28 percent upside move is required to reach the “real” S&P 500 milestone.
Trust me, in today’s post-bubble financial world, where the major players are engaged in a race to see who can devalue their currency fastest, this inflation adjusted measure is the only true way to keep score.
For instance, an investor who bought the SPDR Dow Jones Industrial ETF (DIA) in January 2000 would appear at first glance to be up 22 percent today. Ah, but in real terms, the investor’s wealth has actually shriveled 10 percent over this period.
The “real” value of the S&P 500 and Dow brings up another important, and closely related, topic that investors have been debating lately: Is this a secular or cyclical bull market for stocks?
Cyclical vs. Secular Bull-Bear Debate
I define a bull market as a well defined up-trend in stock prices without a decline of 20 percent or more.
Clearly the 132 percent rise in the S&P 500 since the March 2009 low qualifies as a robust cyclical bull market, although, we have come close to breaking the winning streak on a few occasions.
In 2010, stocks dropped 16 percent when the euro-zone debt crisis first flared up. And the S&P 500 had a near-bear market experience in 2011, when it fell 19.4 percent as the U.S. lost its triple-A credit rating. But stocks soldiered on to new highs each time, showing just how resilient this cyclical bull market has been.
|The Will we witness a new inflation-adjusted high before this bull-run is over?|
Since 1929, the average S&P 500 bull market has lasted 31 months with an average gain of 103.5 percent, according to data from Merrill Lynch. By these metrics the current bull does look a bit long in the tooth, but there have also been many lasting longer and with stronger gains. Perhaps we’ll witness a new inflation-adjusted high in stocks before this bull-run is over!
But if we fall short again, you can chock it up to the secular bear market that stocks have been locked in since the inflation-adjusted high back in 2000.
Keeping It Real:
Do Your Stocks Buy What They Used To?
Defining secular bull and bear markets is more of a judgment call subject to varying interpretations from one investor to another. But look back to the chart above of the “real” S&P 500 Index and I’ll show you my interpretation.
In my view, this long-term inflation adjusted downtrend in stock prices since 2000 fits the very definition of a secular bear market. The value of your stocks may go up on paper, but your portfolio just doesn’t buy what it used to.
The typical pattern of secular bull and bear markets is very long term in nature, as you can see in the chart below.
Many investors have given up on the stock market altogether after the frustration of the past 13 years. But those who do so at this point are probably throwing in the towel at precisely the wrong time.
I’m watching the S&P 500 for a breakout above the inflation adjusted 2007 high thus ending the secular downtrend in prices that’s been in place for over a decade. As you can see above, we’ve been through this all before.
After the stock market crash of 1929, a secular bear market was in force 20 years until 1949. And in the inflationary 1970’s a secular bear market took hold for 16 years. The current secular bear market dated from the inflation-adjusted peak in 2000 is 13 years old, so we may be in store for a few more years of volatility within the range.
Now, don’t get me wrong; this doesn’t mean you should automatically stay on the sidelines until you can be certain the secular bear market is over. After all, the 132 percent nominal rise in stocks during the cyclical bull since 2009 is certainly nothing to sneeze at.
It just means you should keep your asset allocation well balanced and, as always, be selective with your investments. Above all, don’t panic if the stock market experiences another sharp decline in the next year or two; because it’s quite likely to be a fantastic buying opportunity.
Here is the really good news: Extraordinary long-term gains typically follow in the aftermath of a secular bear market … and the secular bulls that follow tend to last longer, too.
After 1949, stocks surged 594 percent higher over the next 20 years. And the secular bull market that began in 1982 ran for 18 years as stock prices soared an amazing 1,391 percent!
The next secular bull market is not to be missed.