I risk stating the obvious when I say that economic times are still tough. The recession, as the term is strictly defined, ended last summer. But that just means that the economy stopped contracting. The environment is still plenty challenging, even if it is a tiny bit less challenging than it was a few months ago.
So it feels a little strange to be discussing the first birthday of the bull market. Most people are not comfortable even calling it a bull market, using paler terms such as rally or recovery. But in any other economic context it would be hailed as a great and wondrous upswing that we have all been lucky to live through.
The S&P 500 closed at 682.55 on March 5, 2009. That turned out to be its low for 2009, and indeed for the decade. It was a level last seen in September 1996. In other words, with dividends ignored, the market had on average returned nothing for thirteen years.
As evidenced by that market low, last March was the peak of economic fear and pessimism. The banking system seemed liable to collapse, unemployment was rising fast, the housing market was in a tailspin, and nobody, not consumers nor businesses, was spending a dime more than was absolutely necessary for anything.
But unless a person was willing to assume a true doomsday scenario, the stock market was then compellingly cheap by just about any measure. (I listed some of them a year ago.) As some wag put it, and I wish I had an attribution for this, "Either the market is a screaming bargain or the world is coming to an end. Well, if the world comes to an end I’m going out fully invested."
Of course, the world did not come to an end, and as confidence built that it would not, the market staged one of its greatest rallies ever. On March 5, 2010 the S&P closed at 1138.70, a one year return of 66.83% before dividends. For most of us, that is a once-in-a-lifetime 12 month gain. The runner up in modern memory is the year ending June 1983, at the start of the 1982-2000 bull market era, in which the S&P gained 52.94%.
And just as most of us had never seen a gain like that before, and likely never will again, virtually all of us missed out on taking full advantage of it. Somewhere there is somebody who got out of the market in the fall of 2008 and then jumped in with both feet in March 2009, but for everybody else the 67% gain is more theory than reality.
Last Friday the S&P closed at 1149.99. That is a little lower than the close on October 1, 2008. And a little higher than the close on November 18, 1998. For most investors, who lack market timing skills and nerves of steel, the 67% run-up gets lost in what is on a longer term basis a very disappointing period for the stock market.
The market is, in my not-so-humble opinion, still fairly cheap. It is hard for me to get my head around the idea that corporate America is now worth the same as it was 11 1/2 years ago. A reasonable person might argue that the market was way too high in 1998, but I am not one of those people. And it would have to have been very overvalued back then in order for today’s level to make sense. If nothing else, inflation has pushed prices up about 33% since 1998, so in real terms the S&P is now about a fourth lower.
Despite the recent glory and present cheapness, I do not perceive much enthusiasm for the stock market these days. Indeed, it is the recent glory and cheapness that is psychologically working against it. Most people do not look at a 67% one-year gain and invest expecting another one. On the contrary, they view 67% as an anomaly. It is either a one-time correction for a one-time problem, or an implausible and unsustainable gain that will no doubt have to be at least partially undone soon.
And the relative cheapness of the market, the fact that it is now where it was 10-15 years ago, tends not to fill investors with optimism. The "Lost Decade" just ended has caused many to question the primacy of the stock market in mainstream investing. On balance, that is probably a good thing. The stock market is not, and has never been, free money. The truly historic 1982-1999 period, in which the market was up 16 of 18 years and averaged 14.8% annual return, gave a generation of investors unrealistic expectations.
But the stock market is still just about the best thing available for ordinary investors. It should not be the only place to invest, and probably should get a lower allocation than has been recommended by most pundits in the past, but over the long run it can still be expected to be the highest returning investment that most people are able to make. (And, not at all coincidentally, also the most risky.)
Now is a scary, or at the least uncomfortable, time to invest in the stock market. At the risk of cliché, it is worth citing the truism that in hindsight the best times to invest were always the times of lowest confidence. It is the times of high confidence, when putting your savings in the market seems like a no-brainer, that tend to lead to tragic events.