Is the next big drop coming?
Over the last 13 years, investors have been conditioned to believe that the stock market may go up and down, but it does not make permanent advances. As a result, I have heard a lot of cautious remarks regarding the latest stock market rally. Many investors I speak with are awaiting the next big drop now that the market has reached new highs. While I openly admit that I have no idea what will happen in the coming weeks and months, I think it would be helpful to compare today’s market to the last market high.
The stock market peaked on October 9, 2007 with the S&P 500 Index at 1,565. As of March 31, 2013 it stood at 1,569. Including dividends, the index returned 13.2% over this 4 ½ year time period. Over this same time period, gold jumped from $740 per ounce to $1,350 and oil went up from $73 per barrel to $97. The Fed Funds rate fell from 4% to near 0% and the 10-year Treasury yield dropped from 4.5% to 1.9%.
During this time between highs, we have had several events that have affected the markets and the economy. Some of these were man-made, like the debt ceiling negations, the fiscal cliff, and the European sovereign debt crisis; some were not, like the Japanese tsunami. We have also worked our way through the housing bubble, the financial meltdown, and the great recession. Hopefully we have learned that no matter how dire the circumstances, stocks (as a whole) have always recovered.
The other great takeaway is that conditions are better for stocks now than they were the last time the market peaked. Profits are considerably higher and interest rates are considerably lower. Of course, by definition, we can’t know of any surprises which may be coming and we certainly can’t predict how investors will respond to events that may unfold, but the overall conditions are presently better for growth.