January 30th, 2012
A post on Ritholtz’s Big Picture blog reflected a conclusion I recently reluctantly needed to begin facing. Regular readers know that for over two years I have been tracking the path of the S&P 500 Index in what I call “Reversion to the Mean” (last mentioned here on November 4). Briefly, the hypothesis was that the S&P has been growing since 1938 at an average annual rate of 7.5% and that it’s volatility around that growth rate was contained in a band of 40% above and below the mean growth rate. The chart depicting that trend, updated with today’s S&P close of 1313.01.
The market’s horizontal path since the end of the Tech Bubble in 2000 appeared to me to have an uncanny resemblance to the secular bear market of the 1970’s. Consequently, I used the end of that prior secular bear market as an analog for the malaise that we’ve been suffering through for the past 11, going on 12 years and wondered where the market might wind up if it exited this time exactly like it did in 1978-82? The result was the following chart:
In November’s blog I wrote:
“…the market has been tracking fairly closely to the exit process back in the ’70′s so far. If that track continues for the near-term, we shouldn’t expect the market to approach the all-time high of 1365 until 2015 and not successfully cross above it until 2017. Let your hearts not lose hope because if it continues following the track then it could reach 3000 by 2020.”
So here we are, two months later and the market is only around 4% away from 1365. With corporate earnings reports better than anticipated, we’re now beginning to read stories about expectations for expanding multiples and higher markets. In a Bloomberg article today:
“Multiples for the benchmark gauge rose as high as 13.82 this year. Should earnings match analyst forecasts and climb to $104.78 a share, the index would have to reach 1,718.39 to trade at the average ratio of 16.4, according to data compiled by Bloomberg. That’s more than 30 percent above its last close. “
The following chart in Big Picture was the coup de grâce:
This is exactly the analog I’d been following for close to two years. On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.
I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.