We are seeing fresh market highs on the heels of impressive 2013 U.S. equity market performance. With the bull’s fifth birthday upon us, it seems U.S. equity markets are back on track. While recent memory is bright, investors who bought in 10, 15, and even 20 years ago may not be as apt to break out the balloons and bubbly. Here we look at the current state of various rolling time frames of total return performance relative to history.
Shorter-Term Annual Compound Return (ACR) Performance Readings Landing In Upper Deciles
Recent market performance has placed current 1- 3- and 5-year annualized performance readings well above their 1926-to-date median levels. Histogram 1 displays 5-year annualized returns. March 5th’s reading registers in the 97th percentileof the distribution (this reading coincides with the exact bottom of the last bear). Shorter-term readings, including the 5-year reading, are much more time sensitive relative to longer-term measurements. For example, just two months ago (year end 2013) the 5-year reading was 17.9%, landing in the 84th percentile.
*Rolling performance incorporates quarterly data back to 1926, so the longer the rolling period, the fewer observations available. All performance presented here employs S&P 500 Total Returns.
As of March 5th, the 1- and 3-year readings were 24.31% (68th percentile, Histogram 2), and 14.82% (65th percentile, not shown), respectively. At the end of 2013 the 1-year reading registered in the 85th percentile.
…While Longer-Term ACR Performance Readings Remain Subdued
The longer-term ACRs are a reminder that even a five year bull market can’t undo the damage inflicted by a double bear market decade.
Histogram 3 depicts the current 10-year ACR performance reading which includes the worst bear market since the Depression. March 5th’s 10-year reading barely breaks out of the bottom quartile of the distribution, landing in the 28th percentile.
The current 15-year annualized return in Histogram 4 is a reality check—it still contains the past two bear markets. March 5th’s reading remains in the first decile of the distribution, with a 15-year annualized return of only 4.53%!
Even the passage of two decades hasn’t bailed us out of this relative performance hole. The current 20-year ACR performance (Histogram 5) lands in the 34th percentile. March 5th’s 9.31% ACR compares to the median 20-year annualized return of 11.52%.
Here’s the silver-lining of this rather gloomy update. Periods of extremely low, long-term ACR readings (particularly 15 and 20 years) have historically presented opportune times to enter the market. This is even more true when they are in the bottom deciles of the distribution. Perhaps all these years of equity market misery mean future birthday celebrations of the current bull are in store, as long-term ACRs move closer to median levels.
© 2014 The Leuthold Group