In Rare Company – 5 Years Later

Today marks the 5-year anniversary of the Bear Market low reached in March 2009. It’s hard to believe that it’s been that long, but even harder to believe what has transpired since. From the depths of despair in March 2009, the S&P 500 is up over 170%, achieving one of the highest 5-year returns in history (see chart below). More surprisingly for many who thought we were on the verge of the next “Great Depression” is the continued economic expansion in the U.S., which will hit its 5-year mark this June.

Does hitting the 5-year mark mean that the Bull Market has to end right here? Of course not. As Ben Graham said, in the short-run, the market is a “voting machine” and there have certainly been longer Bull Markets and economic expansions in the past. Momentum remains strong today and there are currently few signs from leading indicators of an impending economic downturn. However, investors need to be cognizant of where we are in the cycle and what game they are playing at this point in time. This isn’t 2009 anymore; the risk/reward balance is increasingly shifting over to the risk side.


Looking back at history since 1900, there is only a short list of time periods in which we have seen 5-year gains in the S&P 500 that were higher than today:

1)      1928-30

2)      1937

3)      1954-56

4)      1987

5)      1998-00

rare company image1

As market historians, we know how each of these advances would eventually end:

  • The 1929 peak was followed by an 86% decline in the S&P 500 and the Great Depression.
  • The 1937 peak was followed by a 54% decline in the S&P 500 and a 13-month recession.
  • The 1956 peak was followed by a 21% decline in the S&P 500 and an 8-month recession.
  • The 1987 peak was followed by a 35% decline in the S&P 500.
  • The 2000 peak was followed by a 50% decline in the S&P 500 and an 8-month recession.

Sure, that’s an ominous list, you say, but does the current run necessarily have to suffer a similar fate?

No, this time could certainly be different, where the benefits of social media and electric cars outweigh the forces of mean reversion.  But keep in mind, the “this time is different” meme has a very poor track record.

One could also argue that valuations are not nearly as stretched today as they were in 2000. The advance is not nearly as parabolic as it was in 1929 or 1987. Irrational can always become more irrational. While this is true, investors should not be going “all-in” betting on another 1929, 1987 or 2000. At the very least, investors should be lowering their expectations and controlling their emotions at this point in the cycle.

For all investors, this means something different. For us, this means maintaining a disciplined investment process that places a high emphasis on tactical risk management. Our research has shown that this is the most effective way to generate superior risk-adjusted returns over a complete market cycle. This can be frustrating, especially after a runaway move in one asset class as seen over the past year. But the other half of Ben Graham’s saying is not to be forgotten, that in the long run, the market is a “weighing machine.” We intend to be around for the long run and at fighting weight when the inevitable weigh-in occurs.


This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Comments are closed.