By Palash R. Ghosh: Subscribe to Palash's RSS feed
October 11, 2010 5:35 PM EDT
Monday October 11, 2010 marks the third anniversary of the S&P 500 index reaching its all-time intra-day peak of 1576.09 (The index touched its all-time closing of 1565.15 high two days earlier).
Since that time, a series of cataclysmic and tumultuous events (some unforeseen) have changed the economic landscape so dramatically that three years ago seems like three centuries ago.
Consider some of the things that have happened in the past thirty-six months: the collapse of Lehman Brothers; the massive bailout of American International Group (NYSE: AIG), preventing its own destruction; soaring unemployment in the U.S.; unprecedented quantitative easing by central banks; a monstrous stimulus package from the U.S. government; a surreal high federal deficit; near-zero interest rates in the U.S. and much of the developed world;
the near-collapse of the financial systems in Greece, Spain, Ireland and other European nations; historic low Treasury yields; the continuing deterioration of the U.S. housing markets; a catastrophic oil spill in the Gulf of Mexico (among others).
“Three years later and the [S&P 500 ]index is still recovering from what was its worst bear market decline in 80 years,” said Brown Brothers Harriman & Co. in a research note.
Indeed, the S&P 500 index remains about 26 percent below its all-time zenith of three years ago (the Dow is about 22 percent below its own historic peak).
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That day in October 2007 might be considered “the day the music died” – that is, it marked the point at which a multi-year period of loose credit and surging house prices simply came to a stop.
Another big change for three seasons ago might be the behavior of investors. Not only have hundreds of companies and banks disappeared during the financial carnage, but many retail investors appear to have given up on the equity markets – perhaps for good, in some cases – as ungodly amounts of money have been pushed into the safe havens of bonds, U.S. Treasuries (and as we have witnessed in recent months) commodities, especially gold.
According to the Investment Company Institute, investors have removed about $262-billion from domestic stock funds since October 2007, while pouring in $634-billion into bond portfolios.
Another victim of the global crisis – stability. Market volatility has become a kind of '”new norm.” Investors hardly even bat and eye when the market plunges or climbs by as much a 2 percent in a given day.
Indeed, stocks have traversed a dizzying roller-coaster the past three eventful years.
From Oct. 11, 2007 to March 9, 2009, the index plunged 56.5 percent (in just 17 months). Since that market bottom, the index has gallantly climbed 72.2 percent to its current level (the market closed at 1166.15 on October 8, 2010).
“I guessed if you looked at a monthly chart [of this three-year span] you could call it one massive 'V',” said Mark Arbeter, chief technical strategist at S&P. “However, on the daily and weekly charts, the major indices traced out inverse head-and-shoulders or double bottoms at the March 2009 lows so you cannot call it a V.”
How long will it be before the market again fully recovers and touches the clouds reached in October 2007?
Consider that it took seven years for the market to recover from the tech/internet bubble of 2000 (which itself was followed by the housing bubble).
And the global economy is arguably now in far worse shape than it was a decade ago, suggesting equity markets may be range-bound for the long haul
"It's going to be some time before you see the S&P back at 1,575," said Keith Hembre, the chief economist at First American Funds. "There's a tremendous number of imbalances out there, whether it's the deficit, zero percent interest rates or the bloated federal balance sheet."
Sam Stovall, chief investment strategist at S&P, is targeting a 1180 value for the S&P 500 index by year-end, and a 12-month target of 1270. Buy even at that level, the index would still be down almost 20 percent from where it was three Octobers ago.
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