The Stock Market and the Long Run

In the long run, the stock market is about where it should be.

At the peak of the previous bull market in 2007, the S&P 500 reached an all-time high just below 1600. During the Great Recession, it had fallen to a low below 700 about 17 months later. A drop of more than 50%.

The S&P 500 reached its recent peak at almost 3400 in February which we might consider the peak of this bull market. Since then it has fallen to roughly 2400, a drop of about 30%.

Consider this, from the peak in 2007, around 1600 to the drop today to around 2400, the S&P 500 is up 800 points – or 50% from the 2007 record high. That’s an increase of about 4.2% per year in price alone. If we add an average dividend rate of 2.3% over the period, that means the total return of the S&P 500 since the previous all-time high, in the last bull market, is about 6.5% with this pullback. - That’s not bad.

Of course, this might not be the bottom. Still, if we look at the period after the bear market from, 2007 – 2009, from the bottom to return to the all-time high, it took 4 years to regain that previous high, a growth rate of about 30% per year.

Then again, every bull and bear market has its own character. One difference we might consider is the deep economic devastation wrought by the Great Recession. Banks and other lenders entered that cyclical economic event with massive leverage. People similarly had used their homes as piggy banks often taking out home credit lines worth more than the value of the home itself, and we had global manufacturing overcapacity.

In comparison banks, especially in the US, are operating on less than half the leverage they had in 2007. Similarly, the US consumer has increased savings and has the lowest household debt service payments to disposable income in more than 50 years, and we are discussing localizing more production of certain products like pharmaceuticals and medical supplies which will create jobs. One area of concern is that corporations have considerably more debt than they did in 2007, although at much lower financing rates.

Certainly, COVID-19 is going to have a deep, though likely temporary hit on GDP, business profitability and employment. Unlike the previous recession, we believe that the economic turnaround will be far more rapid and therefore the stock market will react positively as well.

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