Bear Turns to Bull?
July 2, 2009  updated each market day 

Click to View The S&P 500 is now 32.5% above the March 9th low, but it remains 42.7% below the October 2007 high.

Click here to review the previous rallies during the current bear market, and here's a table showing the 1929-1932 Dow rallies.

We continue to be fascinated with the saga of the Four Bad Bears. In nominal terms, the latest rally puts the S&P 500 well above than Dow Crash of 1929 over the equivalent time frame.

The accompanying charts are intended not as a forecast but rather as a way to study the current decline in relation to three familiar bears from history.

For a better sense of how these declines figure into a larger historical context, here's a long-term view of secular bull and bear markets in the S&P Composite since 1871.

For a bit of international flavor, here's a chart series that includes the so-called L-shaped "recovery" of the Nikkei 225. I update these weekly.

Since inflation is a favorite topic on this website, I now regularly update a pair of charts to facilitate a comparison of the nominal and real declines. See also my logarithmic scale view of the "Four Bad Bears" comparison.

For a visual analysis of bear market recoveries, be sure to see my Bear Bottoming charts introduced in the next section.


The Bear Bottoming Process
 updated each market day 

Click to View How does the current market compare with previous bear market recoveries? Since 1950, the bottoming process has ranged from around six weeks to eight months. We're in the eighth month of an apparent bottoming process.

Here's a set of charts showing today's bear with the eight completed bear markets since 1950 and how the S&P 500 index performed during the 12 months following the index low. For the sake of completeness, we've included the near-bear decline that accompanied the Gulf War of 1990 — just shy of the 20% decline of an "official" bear.


Unemployment and the S&P Composite Since 1948
July 2, 2009  monthly update 

Click to View

The monthly unemployment rate for June rose to 9.5% — up from 9.4% in May. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.

Unemployment is usually a lagging indicator that moves inversely with equity prices (see chart). Note the increasing peaks in unemployment in 1971, 1975 and 1982. The inverse pattern becomes clearer when viewed against real (inflation-adjusted) S&P Composite, with its successively lower bear market bottoms. The mirror relationship seems to be repeating itself with the current and previous bear markets.

The start date of 1948 was determined by the earliest monthly unemployment figures collected by the Bureau of Labor Statistics. The best source for the historic data is the Federal Reserve Bank of St. Louis.


Here is a link to a Google source for customizable charts on US unemployment data since 1990. You can compare unemployment at the national, state, and county level.

Secular Bull and Bear Markets
July 1, 2009  monthly update 

Click to View Was March 9th the market bottom for the S&P 500, or is there more downside to come? Without crystal ball, we simply don't know.

One thing we can do is examine the past to broaden our sense of the range of possibilities. An obvious feature of this chart of the S&P Composite is the pattern of long-term alternations between up- and down-trends. Market historians call these "secular" bull and bear markets from the Latin word saeculum "long period of time" (in contrast to aeternus "eternal" — the type of bull market we fantasize about). More...


Regression to Trend
July 1, 2009  monthly update 

About the only certainty in the stock market is that, over the long haul, overperformance turns into underperformance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis to the question.

Here's a chart of the S&P Composite stretching back to 1871. The chart shows real (inflation-adjusted) monthly averages of daily closes. We're using a semi-log scale to equalize vertical distances for the same percentage change regardless of the index price range. The regression trendline drawn through the data clarifies the secular pattern of variance from the trend — those multi-year periods when the market trades above and below trend.

For Bearish and Bullish interpretations, click here.


S&P 500 Moving Averages: Current Update
June 30, 2009  Valid until market close on July 31, 2009 

The S&P 500 closed the month of June 35.9% above the March 9th low, but it remains 41.3% below the October 2007 high. However, one of our S&P 500 moving average signals, the 10-month simple moving average has indicated a move into equities.

Background on Moving Averages

Buying and selling based on a moving average of monthly closes can be an effective strategy for managing the risk of severe loss from major bear markets. In essence, when the monthly close of the index is above the moving average value, you hold the index. When the index closes below, you move to cash. The disadvantage is that it never gets you out at the precise top or back in at the very bottom. Also, it can produce the occasional whipsaw (short-term buy or sell signal). More...


Ivy Portfolio Timing Update
June 30, 2009  Valid until market close on July 31, 2009 

VTI For anyone interested in the 10-month simple moving average (SMA) timing strategy presented in The Ivy Portfolio of Mebane Faber and Eric Richardson, see these charts. The 10-month SMA is shown in blue. I've also included a 12-month SMA (the red line) for those of us who favor the longer signal timeframe.

As the charts show, we're seeing a number of signals, depending on the asset class and time frame.

See all five charts...


Is the Stock Market Cheap?
June 27, 2009  updated with the June 24th Standard & Poor's earnings estimates  

Click to View A standard way to investigate this question is to look at the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias.

The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor's website, where the latest numbers are posted on the earnings page in a linked Excel file (see column D). More...


The S&P 500 Collision Course
June 26, 2009  new update 

Click to View The S&P 500 closed the week above the 50- and 200-day moving averages, and the index is also now in positive territory for the year.

Of course, for market analysts, nothing is cut and dried. In the immortal words of Lenny Kravitz, It Ain't Over 'til It's Over.

We'll revisit the chart in another week or so to see if the index can remain above these major indicators.


The Mega-Bear Quartet and L-Shaped "Recoveries"
June 26, 2009  weekend update 

Click to View Here's an update of the Mega-Bear Quartet. It's especially relevant these days because of the frequent mention of L-shaped "recoveries" and references to the Japanese market after the 1989 bubble.

To see the mega-bear comparison more clearly, here's musical analogy that allows you to view the similarities incrementally. Use the blue links to add the parts.

This latest update now includes an inflation-adjusted chart, which gives us a fascinating visualization of the impact of inflation on long-term market prices. The higher the rate of inflation during a bear market, the greater the real decline. Compare the peak of the Dow rally in year seven against the nominal chart. The difference is the result of deflation during the great depression.

It's rather stunning to see the real (inflation-adjusted) decline of the Nikkei, 19 years after its crash. The current lows rival the traumatic Dow bottom in 1932, less than 3 years after its peak.

Over the past few decades, equity markets in the U.S. have had an extended bull run. These charts remind us that bear markets can last a long time. And it's not necessary to go back to the Great Depression for an example.

See also my alternate version, which puts the start of the current secular bear in 2000 with the popping of the Tech Bubble. In inflation-adjusted terms, the S&P 500 reached its all-time high in March 2000. Although the nominal high in October 2007 was higher, the "real" high was not.


Calculating Your Returns
June 25, 2009

Click to View Visitors to this website should check out this great new calculator at Political Calculations:

The calculator incorporates the same S&P Composite data we often feature at dshort.com — the inflation-adjusted monthly averages of daily closes since 1871. With this nifty tool you can calculate the value of an initial investment and optional monthly additions for any range over this 138-year period.

For example, an initial investment of $1000 with $100 added monthly beginning in January 1990 would have had an average annual real (inflation-adjusted) gain of 11.67%, including dividends over the following ten years. Nice!

Let's consider another example, this time starting with the S&P inflation-adjusted all-time monthly-average high, which occurred in September 2000. A $1000 investment that month plus $100 monthly had an average annual real return of -2.96% by the end of last month — a negative return, and that's with dividends included!

What about the same investment regimen over an equivalent time frame (106 months) following the 1929 S&P Composite high? Brace yourself. It would have given you a positive average annual rate of return, with dividends, of 1.35%. Right — that's 4.31% per year higher than the current secular bear.


The Price-Volume Relationship: 2007-Present
June 24, 2009  update 

Click to View Note: I've added vertical highlights to facilitate comparison of the summer (June-July-August) price-volume relationship.


The accompanying chart shows the S&P 500 since January 2007 together with the volume and a 10-day moving average of the volume. The moving average smoothes out daily volume volatility and helps us see the trends.

Note the frequent inverse relationship between price and volume — for example, the rise in volume accompanying the index decline from early January of this year to March 9th. Then the relationship reversed.

The question, of course, is where we go from here. The conventional wisdom is that volume is light during the summer vacation season. That was not the case in 2007 and 2008. Volume increased during the 2007 summer price decline. Likewise 2008 summer volume increased with the price decline that started in the late spring.

The 2009 price has made an apparent "V" bottom with a 40% recovery. Volume has generally moved in the opposite direction. Are we on the threshold of another reversal? Will the summer of 2009 see a price decline on increasing volume as in 2007 and more dramatically in 2008? We shall soon find out.


Inflation Deflation Update
June 17, 2009  updated monthly 

Click to View The annualized rate is -1.28%.

The May 2009 Consumer Price Index for Urban Consumers (CPI-U) is 213.856. The annualized inflation rate computed from this number is -1.28%, which marks the third consecutive month of deflation. The May CPI-U is the lowest annualized rate since the -2.08% of January 1950.

Note: The Alternate CPI gives an annualized inflation rate 6.15% using the ShadowStats pre-1982 calculation method.

The Bureau of Labor Statistics (BLS) began calculating the CPI in 1913 (BLS historic data). Our chart now shows inflation back to 1872 by adding Warren and Pearsons's price index for the earlier years. The spliced series is available at Yale Professor Robert Shiller's website. This look further back into the past dramatically illustrates the extrement oscillation between inflation and deflation during the first 70 years of our timeline.

Historical Inflation Data

Overview: Inflation, recessions and the S&P 500

Table: Monthly & annual inflation data since 1946

Alternate Inflation Data This chart includes an alternate look at inflation without the calculation modifications the '80s and '90s (Data from www.shadowstats.com).

For a fascinating perspective on inflation and the adjustments to the official calculation method, see these videos from ChrisMartenson.com.

The June 2009 CPI is scheduled for release on July 15, 2009.


A Short History of Stock Dividends
June 9, 2009  revised update 

Note: The latest Standard & Poor's earnings spreadsheet (June 3, 2009) puts the current dividend yield at 2.32%.

Click to View The bottom of the 1982 bear market was a major turning point for stock dividends. For more than a century, the market's dividend yield had averaged nearly 5%. But since 1982 the yield has essentially been cut in half, falling as low as 1.1% in 2000. (See the chart.)

What happened? In a nutshell, investors shifted their focus from income streams to price appreciation. As a member of the first wave of Baby Boomers, I explain this shift as a confluence of three things: More...


Bear Music Polyphony
June 4, 2009

Click to Listen In an earlier article I shared the mesmerizing work of lnxrlz007, who set our bear charts to music. "I wonder what they'd sound like as four-voice polyphony?" I remarked at the article's close. Well, this morning, lnxrlz007 has furnished the answer:

Remember the examples of "atonal serialism" in your music appreciation class?

Shades of Arnold Schoenberg!


Race to the Finish, Second Heat
June 2, 2009

Click to View Here's another chart for those who understand that the current bear market in the S&P 500 started in 2000.

The chart is an overlay of our current bear since the peak in March 2000 and the S&P 500 from its peak in 1968 to its gnarly bottom in 1982. Both are adjusted for inflation using the Bureau of Labor Statistics' Consumer Price Index. The charts exclude dividends.

Most people, even first wave Boomers, don't realize the savagery of that earlier 14-year decline other than perhaps a recollection of the rampant decade of stagflation that started with the 1973 oil embargo. The chart illustrates how both bears behaved over a nine-year period following their peaks and how the stagflation bear continued its race to the bottom for another four-and-a-half years.

It will be interesting to check back in four-and-a-half years to see who wins.

Click here for the first heat.


Race to the Finish
June 2, 2009

Click to View For those of us who believe the current bear market in the S&P 500 started in 2000 with the Tech Crash, here is a chart that resonates.

The chart is an overlay of the S&P 500 from the peak in March 2000 and the Dow from the peak in 1929. Both are adjusted for inflation using the Bureau of Labor Statistics' Consumer Price Index. The charts exclude dividends. We can see how both indexes behaved over a nine-year period following the peak and how the Dow comported itself over the next decade.

The future for today's S&P 500 over the next decade remains to be seen.

Later this week we'll look at a similar chart with dividends included.

Click here for the second heat.


The Sound of (Bear) Music
June 1, 2009

Hi Doug,

Found your website very interesting. The graph of the 4 bears is fascinating.

I would like to plot that data into a tone generator and thus make a tune ;-) (will probably sound like a Stuka bomber)

Is it possible for you to let me have the data?

lnxrlz007


How could I resist? The next day I received an email from lnxrlz007 with four mp3 files attached. If your computer can play this file type, click the links below to hear the unique (but strangely similar) melodies of our Four Bad Bears. At first I thought these were atonal, but after repeated listening, I think I detect the key of Ursa Major.

I wonder what they'd sound like as four-voice polyphony?


Market Risk: Stocks versus Bonds
May 18, 2009

Click to View Over the weekend I posted an updated pair of charts showing the danger of overconfidence in equity diversification as an investment risk-management strategy. Here is a simpler illustration of the value of holding a fixed income allocation and increasing that allocation as retirement approaches, especially if you're counting on your nest egg to fund non-discretionary retirement expenses.

Of course, if your other sources of income — Social Security, pensions, and that bequest from Aunt Susan — will cover all your needs, then no need to fret over a decade or two of portfolio pain. Otherwise, it makes sense to balance risky assets with an appropriate, age-adjusted ratio of fixed-income assets. This will help, as we pointed out previously, to reduce the odds that a market implosion in retirement has you dining on cat food.


Diversification Works... Until It Doesn't
May 17, 2009 updated 

Click to View Diversification is a cornerstone of Modern Portfolio Theory and portfolio risk management. We spread our investments across a range of asset classes to ensure participation in the upside and reduce exposure to the downside. This is a time-honored strategy that works ... most of the time. But during epic market downturns, equity asset classes tend to march to the same dismal drumbeat.

How do we protect against these infrequent but destructive events? First we need to understand that they do happen — a reality this website has endeavored to illustrate over the past 18 months. Followers of buy-and-hold investing need to balance risky assets with an appropriate, age-adjusted ratio of fixed-income assets in their portfolios. This will help to minimize the chance that a market implosion near or in retirement is a life-changer.

Click to View Another approach is to employ a tactical asset allocation strategy that attempts to reduce equity holdings when the market appears significantly overvalued or when it is trending down. Both of these conditions, market valuation and moving averages, are periodically addressed at this website. In fact, we've been updating our moving average data for the S&P 500 after the close of business at the end of each month.


S&P Total Return or Total Disappointment?
May 14, 2009

Click to View Here's another in our series comparing total return in today's bear market with the Crash of 1929 (previously here and here).

In real (inflation-adjusted) terms, the S&P Composite needed 29.25 years to regain the 1929 pre-crash high. However, with dividends reinvested, the inflation-adjusted total return was an impressive 385.9% when the index price finally broke even in November 1958.

Will the secular bear market that began in 2000 have the same total-return success when the S&P 500 eventually breaks even? Given the much lower dividend yield over the past two decades, the prospects are far less encouraging. More...


S&P Total Return Bear Comparisons: 1929 and 2000
May 12, 2009

Click to View Here's a follow-up on our previous comparison of total returns in today's bear market and the Crash of 1929. In real (inflation-adjusted) index price, the all-time market high occurred in 2000, not 2007. So we've modified our previous comparison by starting the current decline in August 2000 and overlaying an equivalent period from the Crash of 1929 into the Great Depression. We're using monthly averages of daily closes for data points, which is why we're starting the current secualr bear in August 2000 rather than March. Although the daily high did occur in March, the monthly average of daily closes peaked five months later.

This new chart offers a fascinating — and somewhat disturbing — comparison. Like the earlier chart this one shows both the index price (excluding dividends) and total return (with dividends). More...


S&P Total Return Bear Comparisons: 1929 and Today
May 11, 2009

Click to View The Four Bad Bears chart on this website uses the Dow for the Crash of 1929 and the S&P 500 for the other three bears. It's a bit of an apples and oranges comparison necessitated by my lack of daily data for the S&P index prior to 1950. I've also rationalized the combination because of the popularity of the Dow as an emblem of the earlier era and its increasing irrelevance as an indicator for the broader market over the past couple of decades.

Here's a the first chart in new series that focuses exclusively on the S&P Composite. It's based on real (inflation-adjusted) monthly averages of daily closes. Also, the chart shows both the price (excluding dividends) and total return (with dividends). More...


Mortgage Resets and the Market
May 7, 2009

Click to View The S&P 500 is up nearly 36% from its bear market low on March 9th. Sentiment is somewhat less negative on several fronts. Credit crisis indicators, the ADP employment report, bank stress test leaks, and the market rally itself have all encouraged optimism that the worst is over.

According to Wall Street, the market is forward looking. But has the market really discounted the future impact of continuing mortgage resets? Here's a widely circulated Credit Suisse histogram of resets to which I've added a thumbnail of the S&P 500 matching the timeline from October 2007 to the present. There are a lot more resets ahead — option-adjustable, prime and alt-A — over the next 2 1/2 years.


The Break-Even Curve
April 22, 2009

Click to View Earlier this week I received an email questioning my percent decline and gain numbers for the current market.

"How can the S&P 500 still be down over 45% if we've had a rally of more than 25%?"

Experienced investors understand the concept that a 50% loss requires a 100% gain to break even. But a chart gives us a clear illustration of the exponential relationship between a percent loss and the gain required for a full recovery.

Fortunately, the right end of this "Hockey Stick Curve" is rarely relevant for broad indexes. But individual stocks are a different matter. As of today, Citigroup, Inc. (C) has rallied 319% off its low of 1.02 set on March 5th, which was a 98% decline from its all-time high in December 2006. But even with its 319% gain, the stock is still down 93.6%.


The 2009 Retirement Confidence Survey
April 14, 2009

Retirees at play The mission of this website is financial life cycle planning with a special focus on retirement. Over the past several months, the mission has been sidetracked by the economic meltdown, and our focus has been diverted to the astonishing behavior of the market.

But the 2009 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI) reminds us of our original purpose. The press release announcing the publication sets the tone:

The recession has cast a pall over the retirement expectations of the vast majority of Americans, leaving a record-low 13 percent this year able to say they are very confident of having enough money to live comfortably in retirement, according to the 19th Annual Retirement Confidence Survey (RCS) released today by the nonpartisan Employee Benefit Research Institute (EBRI). Among workers, those feeling very confident about retirement has tumbled by one-half in the last two years.

Here's a link to the Executive Summary, which contains a link to the survey in PDF format and links to fact sheets on key topics:

These materials provide an excellent overview of sentiment on the topic and should serve as a powerful motivator to focus on our individual retirement strategies.

The Annualized Returns Roller Coaster
April 10, 2009  revised update 

Note: I've revised the charts for this article, shifting the annualized returns to the left so that the return value lines up with the year the lump-sum investment is made. The original version showed the return at the end of the investment period, which some readers found confusing.

Here's a sobering set of charts that will especially resonate with those of us who follow economic cycles.

Imagine that ten years ago you made a single, lump-sum investment in the S&P 500. How much would it be worth today, adjusted for inflation with dividends reinvested? Brace yourself: Your investment lost 44.7% for an annualized return of minus 5.9%.

Now let's imagine that we time-travel back to September 2000 and pose the same question. Your ten-year inflation-adjusted gain would have been 396% for an annualized return of 16.13%. As the chart illustrates, investment performance with a 10-year timeline has been a real roller coaster as far back as we have data. More...


How Bad is the Economy?
November 20, 2008

Click to View The unemployment numbers and high-profile liquidations (Linens-N-Things, Circuit City, etc.) are sure signs of a recessionary downturn. But the one that grabbed my attention today is a business located near the McDonalds where I occasionally buy a "senior" coffee.

"Oskar Huber thanks you for 81 years" reads the sign over the entrance. You don't need a calculator to do the math: 2008 minus 81 equals 1927.

This business was an infant during the Crash of 1929 and was pre-schooled by the Great Depression. But 2008 marks its demise. Eighty-one years — that's close to a healthy human life span.

Best wishes to all the Oskar Huber employees for speedy new employment.


The Millionaire The Millionaire Delusion
By Doug Short
January 16, 2008

Will a million be enough to fund your retirement?

"Who wants to be a millionaire?" Regis Philbin asked when the popular TV show of the same name debuted in the United States in 1999. The program had originated the year before in the U.K. and eventually created a worldwide craze, with spinoffs in more than 70 countries, including places as diverse as Iceland, Kazakhstan, Nigeria, Thailand, and Uruguay. More...


Addicted Addicted to Porn
By Doug Short
December 31, 2007

Of course, I mean financial porn!

Looking for hot trades? Do you get your tips from CNBC's Fast Money crew? Is Mad Money's wild man Jim Cramer your trading guru? And speaking of trades, did you know that earlier this year, CNBC's Maria Bartiromo, aka the "Money Honey," actually filed to trademark her nickname?

The airwaves are awash with real-time coverage of the markets. I could spend my entire waking life toggling between CNBC, Bloomberg, and now Fox Business News. If I'm watching Squawk on the Street but need to run to the store, no problem! I can catch the broadcast on XM Radio. Off to the gym? Every treadmill at my fitness center has a personal LCD TV attached. I can pace myself to streaming live quotes from the New York Stock Exchange. More...


Flunking Your Retirement
By Doug Short
December 18, 2007

You flunked! Do you know the four-letter secret to retirement success?

Pop quiz! Test your number skills with these two questions:

  1. If the chance of getting a disease is 10 percent, how many people out of 1,000 would be expected to get the disease?

  2. If 5 people all have the winning number in the lottery and the prize is 2 million dollars, how much will each of them get?
Duh! You knew the first answer (100) before you reached the question mark. The second one ($400,000) took a tad longer. Maybe two seconds? Five max?

These questions were asked during a Health and Retirement Study (HRS) to measure the financial literacy of Baby Boomers. While 84% nailed the disease question, only 56% could divide the lottery correctly. People who got at least one of the answers right were asked a bonus question: More...


Why You Can't Plan for Retirement
December 11, 2007

Retirees at play

Does your brain recognize the retired you?

"Me first!"
"I've got shotgun!"
"Looking out for number one!"

These catch-phrases reveal two basic aspects of human nature: Our chronic self-absorption and our focus on the immediate. We spend most of our lives living for today with ourselves at the center.

But now science is beginning to reveal how this innate behavior threatens our retirement. Based on functional magnetic resonance imaging (fMRI), researchers know that certain parts of our brain are more active when we're thinking about ourselves. However, a recent Forbes magazine article mentions some preliminary research at the Stanford Center on Longevity with stunning implications for retirement planning. "When people are asked to imagine themselves in retirement, the parts of their brains that usually 'light up' when they think about themselves don't light up at all. It's as if they were thinking about a stranger." More...


The Beast Attacking Your Retirement
Thanksgiving 2007

Movie monsters pale in comparison.

I've just come from the stunning 3-D cinema version of Beowulf. In my former life as a Beowulf scholar, I would never have imagined our hero facing a monster with the seductive allure of Angelina Jolie — naked! However, I was even more surprised by the monster-sized refreshments at the concession stand, especially because I'm not a frequent visitor to the modern megaplex. I saw lone moviegoers struggling with family-sized tubs of butter-drenched popcorn. More...


Additional Selected Archives

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