Saturday , 17 February 2018

Recent Stock Market Returns Are Not Excessive Relative To History? Here’s Why

US stock market valuations appear stretched, but history reminds us that thisstock-trading-picks1-190x190 form of excess can endure and, with the U.S. economy posting ongoing signs of growth, the market’s upbeat profile of late has macro support. Nonetheless, it’s prudent to consider how performance stacks up in terms of history.

The original article by James Picerno has been edited for length (…) and clarity ([ ]) by to provide a fast & easy read. For all the latest – and best – financial articles sign up (in the top right corner) for your free bi-weekly Market Intelligence Report newsletter (see sample here) or visit our Facebook page.

Some analysts note that the recent run of positive momentum implies that there’s still room for prices to climb so, for some perspective, let’s review the S&P 500’s one-year and three-year returns in context with the past quarter century. As a proxy for the market, I’ll use SPDR S&P 500 ETF (SPY), which has been trading since 1993.

On a rolling one-year basis (252 trading days), performance is certainly impressive. SPY’s 20% one-year gain is well above the long-run average, although in context with the last 25 years this healthy advance is still well below peak performance. That alone doesn’t ensure that the good times will continue, but it’s clear that even higher returns aren’t unprecedented.

Let’s review the one-year data through the lens of Z-scores, which converts the performance history to a scale that shows how returns compare as standard deviations from the mean. Based on the past quarter century, the current 20% one-year gain is less than one-standard deviation above the mean. The implication: the one-year performance at the moment isn’t particularly unusual based on results since the 1990s.

One might argue that one-year returns are too noisy to develop useful perspective. As an alternative, let’s lengthen the trailing window to three years (756 trading days). As the next chart shows, the current 12.3% annualized total return for the past three years is elevated but it’s still well short of the extremes that SPY has generated since the mid-1990s.

Translating the three-year performances into Z-scores reveals that the current 12.3% annualized performance is close to the mean (a zero reading) since the mid-1990s. In other words, a comparatively middling return.

The caveat in the analysis above, of course, is that the last 25 years is a relatively short sample period. The key question: how might the results change by looking at a longer and arguably more robust time series for the S&P 500? … I’ll update the analysis using that longer data set in a future post.

Scroll to very bottom of page & add your comments on this article. We want to share what you have to say!