U.S. stocks are trading virtually in lockstep with 1954, the best year for American equity and the time when shares finally recovered all their losses from the Great Depression.
The Standard & Poor's 500 Index's returns in 2013 are tracking day-to-day price moves in 1954 almost identically, according to data compiled by Bespoke Investment Group and Bloomberg. In no other year are the trading patterns more similar to 2013 since data on the index began 86 years ago. The correlation coefficient between this year and 1954, when the benchmark gauge rose 45%, is 0.95 out of a maximum of 1.
American equities this year climbed above the 2007 peak before the global financial crisis, like they did in 1954 when the S&P 500 reached a new high for the first time since 1929. While bearish investors say the correlation is irrelevant, bulls say the index will keep rising the way it did 59 years ago, as investors regain faith in U.S. profits.
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“The return of confidence theme is analogous to what was experienced in the '50s,” Jim Russell, a senior equity strategist at U.S. Bank Wealth Management, which manages about $112 billion, said in a Sept. 24 phone interview. “We'll never get an all-clear signal, but we got the good enough signal. People feel the crisis environment is behind us.”
The S&P 500 fell 1.1% last week to 1,691.75, the biggest drop since August, on concern that a political showdown over government spending will hurt economic growth. The index is up 19 percent in 2013 and advanced 150 percent since the start of the bull market in March 2009.
The U.S. government is moving toward a partial shutdown for the first time in 17 years tomorrow as Congress deadlocked over Republicans' insistence on delaying the 2010 health-care law. Senator Richard Durbin of Illinois, the chamber's second-ranking Democrat, predicted the government will close after the House voted 231-192 to stop many of the Affordable Care Act's central provisions for one year and tie that to an extension of government funding through Dec. 15.
The rally is following a similar path to the one 59 years ago. In 2013, the S&P 500 climbed from January to May, fell 1.5% in June and rose 5% in July. In 1954, the index posted gains for the first five months, lost momentum in June with an increase of less than 0.1% and gained steam in July by advancing 5.7%. Both years had losses in August.
Record Highs
The gauge surpassed its record of 1,565.15 on March 28 and has climbed 7.8% since then. Kroger Co. and Honeywell International Inc. rose above their all-time highs this year, and almost 200 S&P 500 companies in September exceeded their peaks from the last 52 weeks, data compiled by Bloomberg show.
In September 1954, the S&P 500 exceeded the 1929 record and rallied 12% more through the end of the year.
“We're nicely above the old high, and we're just getting to a point where the economy is getting back online,” John Stoltzfus, chief market strategist at Oppenheimer & Co. in New York, said in a Sept. 24 phone interview. “There's another leg to come in this bull market.”
The market gained in 1954 as the economy recovered from a recession and earnings expanded during the Cold War. While gross domestic product shrank 1.9 percent in the first three months of the year, it grew an average of 5.6 percent the next seven quarters. The S&P 500 valuation rose to 13 times earnings in 1954 from 9.9 at the end of the previous year, S&P data show.
GDP has expanded at a slower pace during this bull market, climbing an average of 2.2 percent each quarter since the recession ended in 2009. The index's price-earnings ratio increased to 16.2 from 14.1 in January and profits have almost doubled in the past four years.
“Stocks are clearly less attractive than they were a year ago, but they're still attractive relative to many other asset classes,” Paul Zemsky, the New York-based head of asset allocation at ING Investment Management, which oversees $180 billion, said Sept. 26.
The S&P 500's 5.3% advance this quarter compares with a total return of less than 0.1% for Treasuries, Bank of America Merrill Lynch data show. The yield on the 10- year note reached 3.01% on Sept. 6, the highest since July 2011. The Bloomberg Dollar Index, which tracks the dollar against 10 major peers, fell 2.7%, the biggest drop in more than two years. The S&P GSCI Total Return Index of 24 commodities gained 5.4%.
Slowing Growth
The bull market that began in March 2009 has already extended beyond the four-year average length of rallies since World War II, according to data compiled by Bloomberg and Birinyi Associates Inc. U.S. economic and earnings growth are slowing, a sign that equities may lose momentum, according to Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland.
“I don't think we'll see fast enough growth like what we saw in the 1950s that would really offer the opportunity for a surging stock market,” he said in a Sept. 25 interview. “If you look at the valuations, we're not at extremely low levels.”
The S&P 500 rallied 55 percent in the two years after it set the Sept. 22, 1954, record. While it dropped 22% from August 1956 through October 1957, the gauge then almost doubled through 1961.
Economists cut growth forecasts this month to 2% for the third quarter from an earlier estimate of 2.3%. GDP hasn't expanded faster than 3% since the beginning of 2012. The Federal Reserve unexpectedly refrained from reducing its $85 billion bond-buying program this month, saying it wants more evidence of an economic recovery.
U.S. profits have increased an average of 4.2% per quarter since the start of last year, compared with the 28% average in 2010 and 2011. Companies will increase earnings 5.2% for the full year and 3.2 percent excluding financial firms and banks, according to more than 11,000 analyst estimates compiled by Bloomberg.
While shares rallied this year, they are still cheaper than the historical average. The S&P 500's valuation is 17% below the mean since 1998, data compiled by Bloomberg show. During the last bull market, the multiple climbed as high as 21.7.
“As we are moving through these big problems the globe has had over the past five years, the valuation is going up,” David Chalupnik, head of equities at Nuveen Asset Management in Minneapolis, said in a Sept. 26 phone interview. His firm manages about $115 billion. “But the S&P 500 is reasonably priced versus its own history. Stocks still look attractive.”
Fund Flows
Confidence was shattered in the 2008 financial crisis. U.S. equities lost $11 trillion in value and stock mutual funds had more than $200 billion in withdrawals from October 2007 through March 2009, according to data compiled by Bloomberg and the Investment Company Institute. Investors are just now returning to the market, adding about $15 billion to equity funds in 2013, the first annual increase since before the crisis.
It took 25 years for the market to recover after the Great Depression. The Dow Jones Industrial Average dropped 89 percent from 1929 through 1932 and finally made up the losses in 1954.
The S&P 500 is on track for its biggest annual gain since 2009 as improving economic reports outweigh speculation about higher interest rates and the U.S. budget debate that threatens a government shutdown. Investor confidence pushed volatility to a seven-year low this quarter, with daily average price moves for the S&P 500 dropping to 0.45% from as high as 3.31% during the height of the financial crisis at the end of 2008, Bloomberg data show.
“We get better at dealing with challenges as time goes by,” Stoltzfus said. “We have gotten more accustomed to dealing with problems that are related to structural issues.”
Honeywell, the maker of cockpit controls and thermostats, has traded most in line with the S&P 500 this year. The stock, which is valued at 16.1 times earnings, set a record when it climbed to $86.79 on Sept. 19. Analysts forecast the Morris Township, New Jersey-based company will increase earnings 10% this year and 12% in 2014.
Kroger reached a high as it rallied 56 percent in 2013. The largest U.S. grocery-store chain is cheaper than the S&P 500, trading at 14.2 times reported profits. Adjusted per-share earnings at the Cincinnati, Ohio-based company jumped 39 percent in the fiscal year ending in January.
(Bloomberg News)
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