Why The Next 15 Months Are So Critical For S&P 500 Index Fans

The 20th anniversary of the Dot-Com Bubble could 
get really interesting, and uncomfortable

 As a reminder, I am a big fan of investing in the stock market to pursue a very wide range of investment objectives.  And as a long-short investor, I make it my business to monitor both the reward potential and risk of major loss for those I interact with.  Along the way, I meet plenty of folks I would call “fans” of the stock market, particularly the S&P 500 Index.

This was never a “thing” until the 1990s, when the combination of a second decade of strong economic growth and the dawn of financial television (CNBC, primarily) helped create an emotional bubble around “Dot-Com” stocks.  But the investing public has had a love-hate-love-hate-love affair with the stock market, and especially the S&P 500 Index, for nearly 20 years.

The 20th anniversary of the start of the Dot-Com Bubble’s slow-motion crash (it took about 3 years from top to bottom) that followed two decades of nearly-constant stock market bliss was in March of 2000.  Now that we are within viewing distance of that 20-year mark, it occurs to me that with the S&P 500 showing signs of tipping over, it could create a very uncomfortable event for many long-term fans of long-term investing in the S&P 500.

That index ended March of 2000 at about the 1,500 level.  As the chart here shows (blue line), it has grown by over 70% from that point through December 14, 2018.

To some, 70% will seem like an enormous return, but when you earn that over more than 18 years as the S&P 500 has, it is around 4% a year.  I wrote about this fallacy of assuming the stock market “always” compounds at 10% a year in a Forbes.com article not long ago.

So now I am adding to that thought by giving the S&P 500 some “easy” competition over that time period.  That competition comes in the form of an index of 1-3 month T-bills, essentially the most risk-averse investment on the planet this side of stuffing cash in a safe, or under your mattress (if your home was guarded like a fortress).

The return of T-bills since March of 2000 is about 35%, so about half that of the S&P 500.  It sure would be uncomfortable for those who espouse “long-term investing” for conservative investors if we reached the point where the S&P 500’s return was no better than T-bills…over 20 years!  But with the long S&P 500 bull market weakening, it is not that farfetched.

In fact, if T-bill rates continue at their 2%-ish pace for the next 15 months, until March of 2020, their 20-year return will end up around 38%.  What would it take for the S&P 500 to descend to break even with that return?   It would have to fall all the way down to about 2,070.  For historical reference it closed at 2,085 on November 4, 2016, just before the U.S. Presidential election.  In other words, if at some point in the next 15 months, you see headlines about how the stock market has erased the entire rally since the election, you will know that the S&P 500’s 20-year return was no better than that of U.S. Treasury bills.  Think about what THAT would do to the conversation around investing, particularly for financial advisors that continue to hang their hats on the idea that in investing, everything gets better with time.

And if you are immediately dismissive of the possibility that the S&P 500 could fall to 2,100 or less at some point in the next 15 months or so, note that this would be about a 20% decline from its level as of this writing.  And it would be about a 30% decline from its all-time high.  That does not seem so impossible, given the market cycles that have occurred since the year 2000.

As always, my intention is to alert you in a way that will prevent you from falling prey to investment myths.  I don’t know what the stock market will do over the next 15 months, but I do believe that risk of major loss outweighs reward, and that will hopefully prompt you to look just a bit closer at what you own and why you own it.  This is especially important if you are in retirement or nearing it.  After all, the worst time for a sea-change in markets is when you are about to dive into a sea-change in how you pay for your lifestyle.

Also, do not take from this article that T-bills are an amazing long-term investment.  They largely reflect inflation changes, if that.  For the time being, they are a renewed source of comfort for investors that have spent a decade earning zero on cash and equivalent investments.  But over time, I think most investors will ultimately need to move at least a bit out on the reward/risk scale, even if it is nowhere near the risk of a stock-laden portfolio.

The S&P 500 index is a very helpful list of the largest public companies in the U.S. stock market.  As a longtime follower of that index, I am glad for that.  What I rebel against is the self-fulfilling prophesy that S&P 500 Index funds have become.  The way they are constructed, the way they are assumed to be many things they are not, and the sales-pumping machine that now promotes them as a bigger part of an investment plan than they typically should be – those are my concerns.  And that is why I will continue to ask you to look beyond the hype, determine the role and application of any such investment to your specific situation, and do so with eyes wide open.

For research and insight on these issues and more, click HERE.

Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors.

source: forbes.com