As the bull market continues, there are more and more companies entering the “200 club,” which I’ve dubbed as companies with market caps exceeding $200 Billion. At current count there are 14 US companies that make the list.
For comparison, this time last year there were only six companies with market caps greater than $200 B and at the height of the last bull market in October 2007 there were seven. At the depths of the bear market in 2009, Exxon was the only company with a market value greater than $200 B. And on December 31, 1999 there were nine members of the 200 club, although there were also two members of the “500 club”; MSFT and GE each had market caps larger than $500 B.
Source: Compustat Data
One week after I wrote a post about the S&P 500 being up 14.5% year to date, the index is now up 16.5%! As I wrote last week, this is a spectacular increase even when judged on an annual basis, and our year to date rise already puts 2013 in the top 1/3 of all years in $SPX history.
As the previous statistic would imply, at least 1/3 of all years show greater increases than we have had so far this year, so one might think that a continued rise isn’t impossible. However, if you take the market’s initial valuation into account a continued rise would be a more rare event.
Using the Shiller Cyclically Adjusted PE ratio, the market started the year at 21.9x earnings. Since 1900 there have been 33 years that the market has begun the year with a Shiller PE ratio greater than 20x. Only 7 times has it risen more than 16% in those years (using the $DJIA). All of those occurrences happened within the last 20 years, most of them in the 90’s.
Many of the older investors that I speak to who have been investing for 20+ years are some of the most bullish people that I know. It’s likely that part of the bullishness is because these investors have seen the illogical heights of valuation that securities can be pushed to in a bull market. Still, to the extent that one believes that the 90’s were an anomaly and that we have spent the last 12 years unwinding a stock market bubble, a return to higher valuation is unlikely. Within that framework it seems similarly unlikely that we will have an annual close much higher than we are today.
Source: FRED, multipl
(Note: Yes, there are plenty of flaws with the Shiller PE, but it does help smooth the effect of abnormal spikes that occur with a traditional PE ratio like in 2009 and it has been calculated back to 1900. I also realize that it’s not a perfect comparison to use CAPE and Dow, but it’s close enough)
The current economic expansion is now in its 47th month going back to June of 2009. That means that since 1857 there have only been seven periods of expansion that have lasted longer than the current one. Out of the 33 total cycles in that period, the average expansion lasted 38 months. Since World War II the average has been 58 months in 11 cycles.
As the market continues to climb, we’re entering that crucial 50 month period where two secular bear market expansions stalled (1933-37 and 1974-1980). On the other hand, it’s totally possible that we’re on a path more like decade long expansions of the 60’s, 80’s and 90’s. So which will it be Mr. Market? The answer has pretty big implications for whether one thinks that the market can continue to advance from here.
I spent a fair amount of time last year tracking how similar this bull market has been to the 2003-2007 bull market (first: here). So far 2013 has gotten off to a much faster start than 2007 (just like 2012 started off a little faster than 2006 did). However, today’s sell off could be a signal that the correlation remains intact. In the last cycle, the first sign of recession came on February 27, 2007, when the Dow sold off by 416 points, the largest decline at the time since 2001. On that day the VIX spiked from 11 to 18, similar to today’s jump from 14 to 19. If this proves a proper historical reference point, below is a road map of how things could unfold from here.
In 2007 the initial spike in the VIX proved somewhat short lived. The February spike was actually caused by fears about China’s growth (note there’s not a word about subprime in that CNN article), and the S&P 500 rallied from March through July. Subprime fears didn’t truly start to take hold until summer of 2007 when Bear Stearns’ hedge funds blew up. Importantly, the S&P 500 made new highs in October of that year and NBER lists that the recession began in 4Q07. Even though the February and Summer VIX spikes were the early precursors to recession, they were largely dismissed by bulls for almost a year before the market topped.
Through February 20th there’s only been one day this year that the S&P 500 has fallen by 1% (Update: well, make that two). That marks the 3rd year in a row that the year has gotten off to an extremely mild start. In 2012 it took until March to have a 1% down day and that ended up being the only one in the first quarter. At this point in 2011 there had only been two big daily declines. On average, the S&P 500 falls by 1% 26 times per year, a little over 6 times per quarter.
This is an update to a post that I first wrote last year, the last time that the S&P 500 had a big rise in the first month of the year.
When the S&P 500 has a good first month, it has statistically been followed by a really good year. The index has risen by more than 4% in January 18 times in its 56 year history. In those years it has averaged a 21.1% return for the full year, and it has been up double digits in every one of those years except for 1987 (which was a good year up until the October crash).
The S&P 500 has never been negative in a year with a big January, but it’s worth noting that if a similar analysis is performed on the Dow, which has a 118 year history, there are five years (out of 28) that the index was up more than 4% in January and ended negative for the year. Many of those years were significantly negative too: the average loss was 18.4% and the list includes 1914, 1929 and 1930. The index ended those years down 30.7%, 17.2% and 33.8% after being up 5.1%, 5.8% and 7.5% in January respectively.
Weird eerie coincidence, the Dow has had a daily crash three times in its history: in 1914, 1929 and 1987. All three years had big Januaries.
2012 was a pretty mild year as far as volatility is concerned. There were two periods of correction, but both were relatively light and there wasn’t a single day that the S&P 500 was down 3% or more.
Markets have calmed down to the extent that it’s actually been 448 days since the last time that the S&P 500 has fallen by 3% or more in a single day. At today’s level on the Dow that would be a 400 point decline. For comparison, since 2008 we had grown accustomed to getting a decline that large once every 32 days on average.
Looking at S&P history since 1957, the current 448 day streak is better than average, but not quite at the best levels that the index has ever seen. Over that period, a 3%+ daily decline happens about once every 217 days. However there are several long periods without them. There was no such decline for 11 years between 1962-1973. Even recently there wasn’t a 3% decline for nearly 1500 days between 2003-2007. That streak was broken on February 27, 2007.
As of today, the bull market which began in March of 2009 is 1,422 calendar days old. Over that whole period there have been nine drawdowns of greater than 5% which segment the bull market into ten periods of bull market rally.
The average bull market rally since 2009 has lasted 99 calendar days and has seen the market rise by 18.8%. By contrast our current rally, which started in mid November, is just 75 days old and has charted a 10.9% rise. If this rally were to last in line with the averages it would go on until February 22 and the S&P 500 would rise to 1608 before the next 5% pullback. Below is a chart of the full bull market broken down by periods of rally and >5% drawdown.
Even though the Dow was down by 12 points today, it’s beginning to look increasingly likely that we’ll see a new all time high for the index in the not too distant future. The previous all time high was at 14,164, just 281 points away from where the index closed today. The index hit that mark in October 2007–a little over 5 years ago. That’s the 5th longest span in history that the Dow Jones Industrial Average has gone without making a new high. After the depression it took 25 years to get back to its highest levels.
Last year the S&P 500 was positive for the entire year–it didn’t close in the red YTD on any single day, and so far in 2013 the streak continues. While there was little fanfare over the S&P 500’s perfectly positive year, the occurrence was actually pretty rare.
Scanning data of the S&P 500 since 1957 produced only three other years that the index started the year positive and never closed negative on a YTD basis. Below are the charts of those years: 1958, 1964, 1976 and 2012. The returns in these years were 43%, 16%, 23% and 16% respectively. An initial run of the data produced 12 years that were almost perfect, but 8 of those were lower on the first day of trading before heading higher for the rest of the year.