Why 2K?

This week’s blog is dedicated to the memory of Myrna Fruitt, who passed away this week at age 81.  She was a lifelong Bostonian, an artist of some repute in that area, and a joyous spirit.  My aunt Myrna will be missed by all who knew her.  You can see the creative work she left us at http://www.fruittiongallery.com


 How did the S&P 500 get to 2,000…and Where is it Going?


This week, the S&P 500 stock index crossed the 2,000 mark for the first time (this figure and other historical returns referred to in this article do not include dividends).  Round numbers always get the media’s attention, so avid market-watchers already know this.  But why?  Why, just six years after the financial world seemed to be ending, are we celebrating a milestone that at that point seemed a generation away?


Here is our perspective on it.  Consider the following:


1. Buy our estimation, the S&P has gained over 15% per year since the end of 2008, which was shortly before the depths of the market’s financial crisis slump.


2. On the other hand, since the end of 1999 (as the dot-com bubble was preparing to burst), the S&P has produced a return of just a tad over 2% per year…for nearly 16 years!


3. In between those two extremes, if we look at the S&P’s annualized return since it first crossed the 1,000 level on February 2, 1998, that return is about 4.3%.  That is not horrible.  However, if you asked investors if they would buy a stock index portfolio knowing that it would return about 4% per annum, we don’t think most would jump at the chance.  There is still a feeling that 10% a year is a divine right of each investor.  History does not back that up whatsoever.


So, what are you buying when you buy an S&P 500 Index Fund or an actively-managed fund that is really a “closet-indexer” – one whose manager aims to track the index very closely, for fear of a period of large underperformance?  We think you are getting an investment that is only as good as market conditions when you made the investment.


Are we in a pre-tech bubble as in 1999?  Or is the Fed’s massive economic stimulus simply an ongoing adjustment to some new economic era, where market participants come to understand that central banks will backstop anything that causes trouble?


As you can tell from reading past issues of this blog, we think the truth is closer to the former example above.  We have highlighted it through our “RedShoots” list of macro-market issues creeping up on investors, but not yet at critical impact points.  We also continue to see evidence that performance envy (whereby your neighbor’s success is a source of jealousy) is back in vogue.


Then, there is the index investing crowd, which continues to ignore the possibility that people saving for retirement will not earn enough over a longer time period (such as 16 years at 2% a year) to fund the retirement lifestyle they set out to achieve.


As with the infamous false alarm that was the Y2K technology furor back in the late 1990s, the S&P 500 Index at 2,000 may not be much to celebrate.


Our belief at this point: investors should be very mindful of the times they are living in.  They may combat the uncertainty by adopting hedging methods that can potentially smooth the retirement investing ride without a lot of fanfare.


© Sungarden Investment Research


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