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Have you looked at any stock market charts recently? The market has risen for four straight weeks, and things are looking up. In terms of raw numbers, the S&P is up nearly 50% from its March lows. Here’s the chart.
Given the above, the stock market is really on a tear. Right? Well… It’s depends on your perspective. Let’s step back and see how things look since the Fall of 2007.
Ouch. Even after the rally this spring/summer, the S&P 500 is still down roughly 35%. Let’s look back a bit further.
Hmmm… A rough ride, but the market is up 22% since the Fall of 2002. What happens if we look back even further?
Yikes. Another rough ride, but this time the news is considerably worse. Down 33% over the past nine years.
Okay, lets step way back to gain a bit of historical perspective…
Interestingly, if you look at that last chart, you’ll see a very steady progression until right around 1994. After that, you get two major spikes followed by painful periods of “regression to the mean.” Note that there was also a less pronounced blip in the runup to Black Monday in October 1987, which marked the largest one day percentage decline in stock market history. Even still, we’ve seen a better than 980% gain since 1970.
I haven’t actually played with the raw data, but just by eyeballing things, it looks like we’re still a bit short of where we would’ve been if that pre-1994 historical growth pattern had continued. I’m not going to make any arguments about whether or not the stock market is currently over- or under-valued, as I really don’t know, and you also can’t tell by looking at price alone.
To me, the most important lesson here is that you need to interpret investment news very, very carefully. Moreover, you need to keep your personal timeframe in mind when making investment decision. Over short time periods, things can get wild. As you ratchet back to much longer timeframes, however, things become more predictable.
Note: Yes, I picked and chose the start dates for these periods to make things look as good or bad as possible. That’s the point.
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