In order to get a long term perspective on the current bear market, I used the date provided by Robert Shiller for the S&P 500 Index (ex-dividend) and starting in 1900, calculated for every month, the rolling 10 year return. The result:
The chart covers almost 100 years of market history and it has a lot to say. The average 10 year return over this time horizon was +89% - the dotted blue line. The following were the tops:
- August 2000 — +365%
- August 1992 — +281%
- June 1959 — +311%
- September 1929 — +247%
Notice how the tops are all around the summer? I know, four instances is hardly a robust sample size but still. If you recall, last summer, Jeremy Grantham was warning his clients the world was a bubble.
Right now, for November 2008, the rolling 10 year return is -25.57%. That is not the lowest but it is quite low. If we assume the worst for this month and take the lowest level at which the S&P 500 Index closed last week, then the monthly rolling 10 year return is -36.51%.
To put things in perspective, we’d have to go back to the summer of 1941 to find lower numbers. The lowest point, within the 100 year time frame used, is August 1939 which provided a soul crushing 10 year return of -62%. Not at all surprising since it is the 10 year anniversary of the great bubble top of the 1920’s.
The other low point occurred in June 1932 with a 10 year return of -43.55%.
Can things get worse? Of course. But at this point, if you have a long term time horizon, a cast iron stomach for risk, the data suggests you should be taking small positions and slowly adding to them cautiously, even if the market continues to tank. That may sound crazy, but where we are right now in market history, only comes about very rarely.
Getting back to Grantham, right now, he is warming up to the equity markets, not just in the US but around the world. In this recent interview, he outlines why he is cautiously bullish and how he is trying to balance two kinds of regrets: getting in too early (more losses) and missing the boat on a rally.
You can also read his most recent quarterly letter in which he goes into much more detail (look in the Reports and Articles folder).
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