On Aug. 25, the S&P 500 index closed above 2,000 for the first time — finishing at 2,000.24. It had taken the index more than 16 years to double from its first close above 1,000 on Feb. 2, 1998, when it finished at 1,001.27. That 16-year span is more than five times as long as it took for the index to double from its first close above 500 on March 24, 1995, when it finished at 500.97.
On its way to 2,000, the S&P 500 had to endure two major bear markets. It fell from its high of 1,576.74 on Oct. 11, 2007, all the way to its low of 666.79 on March 6, 2009. That means the index has risen more than 1,330 points from its bottom five years ago.
From March 2009 through July 2014, the S&P 500 returned just over 22 percent per year, providing a total return of 195 percent — quite an impressive performance for the period. This year alone, it has defied many so-called experts and risen from 1,848 to 2,000, a price-only gain of more than 8 percent.
Now, imagine you had a clear crystal ball and were able to foresee each and every event that has occurred so far this year, with the exception that you cannot see stock prices.
You might think that would give you a huge advantage in terms of investment decisions. You would know whether the economic and political news was positive or negative. You might even think you could then anticipate how that news would affect the markets.
Now consider all the negative news we have had over the first eight months of 2014. Here’s just a short list:
In addition to all this, investors have been bombarded by regular warnings about the market being overvalued. The so-called Shiller CAPE 10 has been well above its historical average for years, and currently stands at more than 26.
Let’s review some of the dire warnings investors have been hearing.
On Feb. 6, 2013, with the S&P 500 at about 1,500, Grantham Mayo Van Otterloo & Co.’s highly regarded and often quoted investment strategist Jeremy Grantham warned that assets are “brutally overpriced.” And he noted this was true around the globe as well.
John Hussman, founder of the Hussman family of funds, has been offering similar warnings for a long time. Since late 2009, he has been calling for another financial crisis due to bad policy choices from the U.S. government.
His market commentary of Jan. 14, 2013, when the S&P was at about 1,465, stated: “Present overvalued, overbought, overbullish, rising-yield conditions fall within a tiny percentage of market history that is associated with dismal market outcomes, on average. It’s true that we’ve observed extreme conditions since about March 2012 with little resolution aside from short-term declines. But the S&P 500 remains only a few percent from its March 2012 high, and if history is any guide, the extension of these unfavorable conditions is not likely to reduce the depth of the market loss that can be expected to resolve them.”
On Dec. 19, 2013, with the S&P 500 at about 1,800, Marc Faber, publisher of the Gloom, Boom and Doom Report and a frequent guest on CNBC, offered this forecast: “The market will continue to decline from its November high of 1,813.” And on May 8, 2014, with the S&P 500 at about 1,870, Faber warned about a coming crisis bigger than the one we had in 2008.
The stock market has been ignoring such warnings and bad news, defying many so-called experts, for years. Just think about all the bad news the market has studiously ignored since it reached bottom in March 2009. Here’s another brief list of some major problems the market has had to deal with over the last five years.
Investors who were scared off by the loud and dire warnings, and who opted to stay with very short maturities, failed to earn the large term premium that has generally existed over the past six years. The yield curve has generally been quite steep. These investors also incurred reinvestment risk because rates not only stayed down, but generally moved lower.
The lesson I hope you take from all this is not only that you should ignore the headlines when making investment decisions, but also that you should ignore all market forecasters. There are simply no good ones. One reason for the inability of anyone to forecast markets well is because, as you have just seen, even a perfectly clear crystal ball that reveals all world events may tell you nothing about where markets are going.
This commentary originally appeared September 3 on CBSNews.com
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