As the US Turns the Decade

Looking back over the last decade in the US you would have been better to put your money under the mattress than invest in the S&P 500. The S&P 500 closed over 20% below where it started the decade in 2000. Although, if you got your timing right, you could have done extremely well. For example, in the last year, the S&P 500 was up nearly 25%, albeit significantly less if you took into account currency.

If we look at the chart on XSP, a representation of the S&P 500 hedged back into Canadian dollars, we can see that the price of XSP started the decade at about $20 and finished the decade at about $13. That is over 30% drop. Currency movements could possibly explain the additional loss, as the Canadian dollar has been on a steady rise since the beginning of the decade. Over the last year XSP has increased from $10.50 at the start of 2009 to about $13 at the end. From a technical perspective the signs are all positive, although, if we look at moving average convergence divergence, MACD, the signal line is starting to level off and could potentially fall if we have any bad news.

The messages are mixed in the fundamental camp. In an article in the New York Times, “Heart-Stopping Fall, Breathtaking Rally”, by Vikas Bajaj, he warns, “But whether investors continue to see gains will depend on more that an economic recovery. As the recession ebbs, interest rates are expected to rise in 2010, weakening the fragile rebound that is emerging in corners of the housing market. Unemployment may be peaking, but many Americans are still struggling to pay bills, or even avoid foreclosure. And the government is starting to pull back on cheap financing it used to stimulate the economy and nurse the industry back to health”. Mr. Bajaj references Barry Ritholz, author of Bailout Nation who says, ”There are long, long periods of time when the market and the economy go two different ways. A rallying market doesn’t necessarily mean the economy is healing.”

We just finished a dismal 10 years for the S&P 500. According to Robert Shiller, a Yale economist, the average P/E ratio for the S&P 500 over the last 130 years is 16.4X. In March when things were at the height of pessimism the S&P 500 P/E ratio 13.3X and now the 10-year P/E ratio is more than 20.3X. After such a huge rally since March, let’s hope future earnings prove the price is right.