The S&P 500 index, representing the top 500 U.S. corporations, reached 2,900 for the first time ever last week. It has surpassed its peak level from earlier this year, and we’re close to hitting the psychologically important 3,000 level for the index.
It’s been an amazing run. At the recession bottom on March 9th, 2009, just nine and a half years ago, the S&P 500 was at 683. Investors that bought and held over this period increased their investment value by over four times. The C Fund, of course, is the TSP fund that tracks it.
And this doesn’t even account for dividends. With dividends reinvested (which the C Fund does automatically), the total return was about 5.25 times the original investment. The C Fund went from less than $8/share to over $41/share during this time.
Smaller companies tend to be a bit more volatile, so they had a bigger fall during the 2007/2008 recession and had an even stronger recovery since the market bottom in 2009. The S Fund which tracks these smaller businesses has returned just over 6 times the amount of money that would have been invested in it back during March of 2009.
The 2040 Lifecycle Fund share price went from less than $10 to over $35, representing a gain of almost 3.6 times the original investment with less volatility than the pure equity funds.
The weakest growth has been in the G Fund over this time, as it only increased by about 1.23 times (a 23% gain) over a more than nine-year period, which was largely eaten up by inflation.
Equity returns over the next 9 years are not likely to be as outrageously good as they were over these previous nine years, because from today’s starting point valuations are much higher and we’re later in the business cycle.
However, while this economic expansion has been the second longest in United States history in terms of time, it’s still one of the weakest in terms of the total amount of GDP growth, as shown by the light blue line below:
Although we’re later in the business cycle, most recession indicators are still giving the green light for the economy for at least the rest of 2018. Beyond that at this time, it’s impossible to say how much longer good economic growth could continue until the next recession. We could run into problems in 2019, or the economy could continue to grow into 2020 and beyond.
Some long-term trends for the end of the business cycle have been building for a while. Corporate debt as a percentage of GDP is accumulating to levels not seen since 2007, home sales and auto sales are stagnating sideways at what may be a peak, the Federal Reserve is regularly raising interest rates, and the yield curve is close to inverting. All of these are core recession indicators.
Fortunately, consumer and bank balance sheets are much stronger than they were in 2007 at the previous peak. Household debt as a percentage of GDP is only 78% today compared to 98% in 2007. Regulations ensure that large banks have higher capital levels to act as cash cushions in the event of a recession that results in loan losses. Credit card companies are reporting historically low levels of charge-off rates, meaning they are being cautious with their lending practices.
Stock market declines usually precede the official beginnings of recessions. In both 2001 and 2007, for example, the market peaked and declined a few months before economic contraction occurred. This is because stock valuations like the price-to-earnings ratio can come down before actual corporate earnings start to decline.
Overall, portfolio diversification is the investor’s best bet against any economic scenario. Holding stocks gives you exposure to long-term growth. Cash and bonds give you protection against recessions, and bonds help protect investors from deflation. Real estate is a solid hedge against inflation. Having numerous asset classes reduces your overall volatility and protects your returns through the market cycle in most cases.