The S&P 500 closed at an all-time high of 1998 on Monday, 27 years to the day after it hit what was then a record high of 337. Over 27 years, this near sextupling of stock prices equates to a compound annual rate of price appreciation of 6.8% or 9.3% including dividend income, nearly one percentage point shy of its 1926-2014 average annual return of 10.1%. That high of 27 years ago is memorable, of course, for the 20% one-day decline that followed within two months (October 19), and it would be nearly two years before the S&P 500 would get back to its August 1987 peak.
We present these facts not as a forecast but as a curiosity, one we suspect will start making the rounds should stock prices move lower over the next several weeks. Stock market history doesn’t repeat so much as it rhymes, to paraphrase Mark Twain (or someone less interesting than Twain and hence not usually cited). In 1987, stock prices had shot up almost 40% through August, while this year’s single-digit gains are humdrum by comparison.
For a while today, the S&P 500 traded above 2000, 16 years after it first breached 1000 in 1998. But stocks were unable to hold at their late-morning highs today. The S&P 500 did finish Monday with a gain of nearly 0.5%, stretching its year-to-date rise to 8.1%. The Dow Jones Industrial Average and the NASDAQ Composite closed with gains of 0.4% and are 3% and 9% above their 2013 closing levels.
The trip from 1000 on the S&P 500 to 2000 has taken quite a bit longer than the market’s typical time to double. To double over the past 16+ years, the S&P 500 has averaged just a 4.3% annual rate of price appreciation, two to three percentage points less than the market’s long-term average annual rate of price return. True, it took 17.5 years for the S&P 500’s climb from 100 to 200. And the Dow’s journey from 1000 to 2000 took anywhere from 14 years (1972 to 1987, using closing prices) to 20 years (1966 to 1987, using intraday quotes). Apparently there is something about these round numbers that trip up the bulls.
As impressive as today’s U.S. stock market action was, Monday’s big stock price gains came in Europe, where the major market indexes rose on the order of 2%. The Euro Stoxx 50 rose 2.2%, as Italy climbed 2.3%, France gained 2.1%, and Germany and Spain each added 1.8%. (The U.K. market was closed today for a bank holiday.) Today’s gains in Europe’s big markets did not derive from fundamentals or economic news; indeed, the German Ifo business climate survey came in lower than expected in August (106.3 vs 107), a fourth straight month of decline.
Instead, investors were buoyed by last Friday’s remarks from ECB President Mario Draghi suggesting that it is time for government economic policies to shift from austerity to stimulus. His speech at Jackson Hole focused on the steep decline in inflation expectations (“at all horizons”) as a particular source of concern. Euro zone inflation is already running at an annual rate of just 0.4% over the 12 months to July. The euro fell to an 11.5-month low of just under $1.32 on Monday. European bond yields resumed their decline today, with the 10-year Spain sovereign debt falling 12 basis points to 2.26%, 13 bps below the comparable Treasury note, whose yield dropped from 2.40% on Friday to 2.39% today.
Reports/dates/facts/links to watch for over the next week:
- August 26: Durables goods orders and shipments (July); Case-Shiller home price indexes (June); Conference Board consumer confidence survey (August).
- August 28: U.S. GDP, first revision of Q2 growth (4.0%); corporate profits, first estimate for Q2.
- August 29: U.S. personal income, spending and inflation (July); University of Michigan consumer sentiment (August final).
- August 31: Markit/JMMA manufacturing PMI for Japan (August); Markit manufacturing PMI for China (August).
Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.