The S&P 500 Goes Supernova

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Random Walker
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The S&P 500 Goes Supernova

Post by Random Walker » Fri Nov 30, 2018 1:37 pm

http://multifactorworld.com/the-sp-500-goes-supernova/

This is a very interesting essay from a website I visit periodically: Multifactor world, written by Jared Kizer. Basic thesis is that the S&P 500 returns have been out of this world since the global financial crisis and is highly unlikely to repeat this performance in our lifetimes. And the Sharpe Ratio has been even further out of this world! He makes this argument with bootstrap analysis. He gives a very good explanation of bootstrap analysis and it’s distinction from Monte Carlo Simulation. I think it’s a great read, and recommend checking in on his website periodically for his roughly monthly essays.

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Re: The S&P 500 Goes Supernova

Post by moghopper » Fri Nov 30, 2018 1:42 pm

I suspect that we could see this kind of return again.

We'd just have to have that kind of downturn first.

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Re: The S&P 500 Goes Supernova

Post by POLO » Fri Nov 30, 2018 1:47 pm

Not a fan of the premise, who expects 16.5% after dividends annually in perpetuity? :?

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Re: The S&P 500 Goes Supernova

Post by aspirit » Fri Nov 30, 2018 2:00 pm

Random Walker wrote:
Fri Nov 30, 2018 1:37 pm
http://multifactorworld.com/the-sp-500-goes-supernova/

This is a very interesting essay from a website I visit periodically: Multifactor world, written by Jared Kizer. Basic thesis is that the S&P 500 returns have been out of this world since the global financial crisis and is highly unlikely to repeat this performance in our lifetimes. And the Sharpe Ratio has been even further out of this world! He makes this argument with bootstrap analysis. He gives a very good explanation of bootstrap analysis and it’s distinction from Monte Carlo Simulation. I think it’s a great read, and recommend checking in on his website periodically for his roughly monthly essays.

Dave
Great link & input Dave!
Statistics's, probabilities I've heard and as you suggest the sharp ratio's metrics all support this beliefs assertion. :happy
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Re: The S&P 500 Goes Supernova

Post by Taj_Mahalo » Fri Nov 30, 2018 2:44 pm

Interesting article. It certainly puts in perspective how great of a run it has been for the S&P. I've got a long ways to go so maybe I'll get lucky and see a period of returns like that but by no means do I expect it.
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Re: The S&P 500 Goes Supernova

Post by columbia » Fri Nov 30, 2018 3:49 pm

The grim 10 year forecasts (which I tend to believe, absent any major changes in valuations) all appear to be predicated in the market not crashing. That seems pretty unrealistic.

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Re: The S&P 500 Goes Supernova

Post by aristotelian » Fri Nov 30, 2018 4:02 pm

I'm so confused. I thought people who invested starting in 2000 were barely breaking even.

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raven15
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Re: The S&P 500 Goes Supernova

Post by raven15 » Fri Nov 30, 2018 4:05 pm

Look at those beautiful normal distributions! I think Mandelbrot would write a chapter about the flaws in that piece.
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Re: The S&P 500 Goes Supernova

Post by shelanman » Fri Nov 30, 2018 4:07 pm

aristotelian wrote:
Fri Nov 30, 2018 4:02 pm
I'm so confused. I thought people who invested starting in 2000 were barely breaking even.
The S&P 500 is about double what it was in January of 2000. That doesn't take inflation into account, but it also doesn't take dividends into account.

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Re: The S&P 500 Goes Supernova

Post by pdavi21 » Fri Nov 30, 2018 4:09 pm

One thing neglected in the article: inflation / interest rates were lower over the "Supernova" period...like unusually lower. The author should have used post inflation returns.

I would like to see this analysis performed on a global stock and bond portfolio. I wonder what that would look like.

The article has a reasonable conclusion: near future returns are likely to be lower than unusually high near past returns. I guess some people that believe in that call it mean reversion.

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Re: The S&P 500 Goes Supernova

Post by Random Walker » Fri Nov 30, 2018 4:13 pm

columbia wrote:
Fri Nov 30, 2018 3:49 pm
The grim 10 year forecasts (which I tend to believe, absent any major changes in valuations) all appear to be predicated in the market not crashing. That seems pretty unrealistic.
Certainly current valuations imply the future mean expected return is lower. What I think relatively few people appreciate is that current valuations also imply the whole future potential dispersion of returns shifts left as well: less good good outcomes and more bad bad outcomes. For me, thinking in terms of the dispersion of potential returns makes me much less inclined to take risk.

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Re: The S&P 500 Goes Supernova

Post by Random Walker » Fri Nov 30, 2018 4:16 pm

raven15 wrote:
Fri Nov 30, 2018 4:05 pm
Look at those beautiful normal distributions! I think Mandelbrot would write a chapter about the flaws in that piece.
Your point only AMPLIFIES the author’s points. Add left skew and fat tails to the implications of the essay, and thinks look worse.

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Re: The S&P 500 Goes Supernova

Post by aristotelian » Fri Nov 30, 2018 4:19 pm

shelanman wrote:
Fri Nov 30, 2018 4:07 pm
aristotelian wrote:
Fri Nov 30, 2018 4:02 pm
I'm so confused. I thought people who invested starting in 2000 were barely breaking even.
The S&P 500 is about double what it was in January of 2000. That doesn't take inflation into account, but it also doesn't take dividends into account.
Sure. The point being that the article is cherry picking the period with highest returns and saying "don't expect these high returns to continue". However, if you just extend the timeframe out a few years, you get pretty normal returns over the period in line with historical returns.

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Re: The S&P 500 Goes Supernova

Post by HomerJ » Fri Nov 30, 2018 4:22 pm

Random Walker wrote:
Fri Nov 30, 2018 1:37 pm
Basic thesis is that the S&P 500 returns have been out of this world since the global financial crisis and is highly unlikely to repeat this performance in our lifetimes.
That is a really stupid thesis.

Seriously. It's already repeated twice in my lifetime, in the 90s and in the 2010s. These kind of large 10-year returns happened in the 1920s and they happened in the 1950s too.

This is how the stock market has always worked so far.

It goes in cycles. You get 10-15 bad years of 3%, and 10-15 good years of 15%, and you end up with 20-30 year returns of 9%.

The NEXT ten years are not likely to return 15% a year again. It would make total sense for the next 10 years to have poor returns (but no one knows for certain), but to say that we will never see a multi-year bull market of 15% a year again in our lifetimes is ludicrous.

It may be true (I will admit I can't predict the future either), but it's still a ludicrous statement to make.
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Re: The S&P 500 Goes Supernova

Post by retiringwhen » Fri Nov 30, 2018 4:35 pm

looking at 5 year rolling returns since VFIAX was founded makes the last 10 years look pretty "normal"...... the decade of the 2000s was more of the outlier.....

Edited: I think the outlier/shocking nature of the blog poster's article is an artifact of not having a lasting bear market and/or recession in the past 10 years. Otherwise, it looks to me like the market has reverted to closer to normal returns on an shorter term basis. This type of analysis, if conducted on shorter rolling return periods, may not look so shocking. This feels a bit like some data mining...... Not that I don't disagree with the cacophony of pronouncements of the next 10 years being less then average. Heck we have had 12 mos. of less than average.

http://quotes.morningstar.com/chart/fun ... 22%3A60%7D

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Re: The S&P 500 Goes Supernova

Post by deepvalleys » Fri Nov 30, 2018 5:04 pm

The last 20 years, SP500 had an annualized return of only 4.24% (according to my calculations). On november 30th 1998 SP500 was at 1176.

Shouldn't I expect the next 20 years to be better?

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Re: The S&P 500 Goes Supernova

Post by garlandwhizzer » Fri Nov 30, 2018 5:06 pm

This bull market which is about 10 years old has produced massive gains with little in the way of volatility. The Fed with its ultra-low interest rates, QE, and purchases of Treasuries and mortgage backed securities drove interest rates to historical lows and kept them there for long years. Basically risk free assets yielded essentially nothing which pushed investment dollars into risk assets like stocks. In short the Fed acted as a backstop for US equities and money flowed for years in an essentially constant stream into the S&P 500. That increased stock prices while the Fed offered a backstop against another bear market, producing high Sharpe ratios for the S&P 500 during that period.

Things have changed. Interest rates are rising slowly and modestly and the Fed is reducing the size of its balance sheet, the opposite of its prior monetary policy. It is entirely possible and IMO likely that going forward from here there will be more volatility in the equity market and that bond returns are likely to be slightly greater than inflation. How alternatives will do in this scenario is not clear to me, but I suspect that returns of all quality assets like low risk bonds and broadly based index funds will be positive long term but likely lower than the robust returns we've gotten used to. How much lower? No one knows. That's a guess, hopefully an educated one, but like all guesses it can turn out to be wrong.

It's important to recall that this decade-long high Sharpe ratio for the S&P 500 was preceded by the greatest collapse in large cap stocks since the Great Depression, an S&P 500 loss of 56.4%. If we add the years of 2007 - 9 to the evaluation that nice reassuring Sharpe ratio will likely disappear. Predicting the market's future based on backtesting is not as easy as it sometimes seems.

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Re: The S&P 500 Goes Supernova

Post by nisiprius » Fri Nov 30, 2018 5:27 pm

Random Walker wrote:
Fri Nov 30, 2018 1:37 pm
...the S&P 500 returns have been out of this world since the global financial crisis and is highly unlikely to repeat this performance in our lifetimes...
1) But half of that was just climbing out of the hole.

2) Vanguard 500 Index:
2010-2017 inclusive: CAGR 13.76%, Sharpe ratio 1.13.
1992-1999 inclusive: CAGR 19.59%, Sharpe ratio 1.17.

So the 1992-1999 seems to have been better than the period since the global financial crisis, both in return and in Sharpe ratio. And the earlier period was all gain, it wasn't climbing up from the bottom of a crash.
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Re: The S&P 500 Goes Supernova

Post by samsdad » Fri Nov 30, 2018 5:32 pm

So does somebody finally know something?

Or is this noise? I can’t get back my time reading this if it’s noise.

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Re: The S&P 500 Goes Supernova

Post by oldcomputerguy » Fri Nov 30, 2018 5:35 pm

So here's the question that presents itself to me: is this going to make a difference in the way I invest?

Answer: nope. Still invested in broad-market index funds, still holding, still rebalancing.

Yawn.
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Re: The S&P 500 Goes Supernova

Post by Jags4186 » Fri Nov 30, 2018 5:38 pm

SP500 returned 17.37% annualized for the 25 year period ending 1999. $1000 turned into $54,000. Why is the current 10 year run considered that incredible?

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Re: The S&P 500 Goes Supernova

Post by OkieIndexer » Fri Nov 30, 2018 5:40 pm

I feel like we're in late 1998 right now, as far as future 10-15 year returns go. But who knows.
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Re: The S&P 500 Goes Supernova

Post by nisiprius » Fri Nov 30, 2018 6:10 pm

Image

The blue curve is Total Stock, VTSMX.
The red curve is Total Stock shifted back in time about eighteen years, so that 2010-2018 overlay 1992-2000.

Yes, 2010-2018 is straighter (didn't feel like it during the 2011 correction), but 1992-2000 had higher average return. And, overall, it seems to me that the twenty-year period 1981-2000 was far, far better than 1999-2018.

So I don't see what was so once-in-a-lifetime great about the period since the global financial crisis.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: The S&P 500 Goes Supernova

Post by tmcc » Fri Nov 30, 2018 7:16 pm

nisiprius wrote:
Fri Nov 30, 2018 6:10 pm
Image

The blue curve is Total Stock, VTSMX.
The red curve is Total Stock shifted back in time about eighteen years, so that 2010-2018 overlay 1992-2000.

Yes, 2010-2018 is straighter (didn't feel like it during the 2011 correction), but 1992-2000 had higher average return. And, overall, it seems to me that the twenty-year period 1981-2000 was far, far better than 1999-2018.

So I don't see what was so once-in-a-lifetime great about the period since the global financial crisis.
nice chart, thanks

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Re: The S&P 500 Goes Supernova

Post by jalbert » Fri Nov 30, 2018 7:27 pm

An article on a site called multifactorworld attributes robust S&P500 performance to some once-in-a-lifetime event? :oops:
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Re: The S&P 500 Goes Supernova

Post by mbasherp » Fri Nov 30, 2018 8:19 pm

I realized today, after researching it to post in another thread, that the S&P500 forward PE is 16.

I don't know what the future will bring. But I don't agree with anyone who says we are near the end of some incredible run and doomed to mediocrity (or worse).

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Re: The S&P 500 Goes Supernova

Post by columbia » Fri Nov 30, 2018 8:39 pm

mbasherp wrote:
Fri Nov 30, 2018 8:19 pm
I realized today, after researching it to post in another thread, that the S&P500 forward PE is 16.

I don't know what the future will bring. But I don't agree with anyone who says we are near the end of some incredible run and doomed to mediocrity (or worse).
Historical chart?

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Re: The S&P 500 Goes Supernova

Post by TVD » Fri Nov 30, 2018 8:50 pm

mbasherp wrote:
Fri Nov 30, 2018 8:19 pm
I realized today, after researching it to post in another thread, that the S&P500 forward PE is 16.

I don't know what the future will bring. But I don't agree with anyone who says we are near the end of some incredible run and doomed to mediocrity (or worse).
Not singling you out but I just do not understand this sentiment. The Fed Funds rate is only at 2.25% and was near 0 for nearly a decade. A month ago Powell said we are far from normalization, the market drops 5-10% and nearly every bull is going catatonic. Two days ago he said we are close to the range of normalization (which could be anywhere from 1-6 more 0.25% hikes) and we are back in a bull market.

Doesn't this say something about the state of the markets, state of the economy and obscene financial repression/manipulation that a historically low FFR and the prospect of minuscule interest rate hikes lead to such reactions? Something is truly wrong and I will gladly short this market. Granted, I could be wrong and will use appropriate risk management but (if I have time and my photoshop finally works) I will happily show some charts to show there is more downside to come.

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Re: The S&P 500 Goes Supernova

Post by AlohaJoe » Fri Nov 30, 2018 9:05 pm

nisiprius wrote:
Fri Nov 30, 2018 5:27 pm
Random Walker wrote:
Fri Nov 30, 2018 1:37 pm
...the S&P 500 returns have been out of this world since the global financial crisis and is highly unlikely to repeat this performance in our lifetimes...
1) But half of that was just climbing out of the hole.

2) Vanguard 500 Index:
2010-2017 inclusive: CAGR 13.76%, Sharpe ratio 1.13.
1992-1999 inclusive: CAGR 19.59%, Sharpe ratio 1.17.

So the 1992-1999 seems to have been better than the period since the global financial crisis, both in return and in Sharpe ratio. And the earlier period was all gain, it wasn't climbing up from the bottom of a crash.
1992 wasn't climbing up from a crash but it was certainly climbing from a worldwide recession that started in the early 1990s and didn't fully end until 1993. NBER officially dated the end of the US recession as March 1991. In the US unemployment rose until June 1992 with a peak of 7.8% unemployment. Surely you remember "it's the economy, stupid" as contributing to Bill Clinton's defeat of George H.W. Bush? :)

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Re: The S&P 500 Goes Supernova

Post by CyclingDuo » Fri Nov 30, 2018 9:10 pm

garlandwhizzer wrote:
Fri Nov 30, 2018 5:06 pm
This bull market which is about 10 years old has produced massive gains with little in the way of volatility.
Always worthy of looking at it from all angles.

Image

Stocks did not even break out above their previous 2007 highs until January of 2013. Some, not until 2016/17 in terms of the Nasdaq from previous highs. Using that premise, it's hard to say the bull market started in 2009 at the lows.

Image

Most people can’t even consider the possibility of the market going significantly higher from here because, according to the media, this recovery is “long in the tooth” and about to end. However, I have made the argument for months now that we resumed a NEW Bull Market in July 2016 (that really began in Jan 2013, NOT March 2009). Very few people want to talk about the Bear Market that recently happened from mid 2015 to mid 2016 where the average stock corrected over 20% and many of the leading sectors corrected between 25-50%.
https://joefahmy.com/2017/04/29/markets ... rmedbroker

This year has been a very similar rolling bear market as we experienced in mid 2015-2016 where gains were digested.
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Re: The S&P 500 Goes Supernova

Post by JBTX » Fri Nov 30, 2018 9:18 pm

HomerJ wrote:
Fri Nov 30, 2018 4:22 pm
Random Walker wrote:
Fri Nov 30, 2018 1:37 pm
Basic thesis is that the S&P 500 returns have been out of this world since the global financial crisis and is highly unlikely to repeat this performance in our lifetimes.
That is a really stupid thesis.

Seriously. It's already repeated twice in my lifetime, in the 90s and in the 2010s. These kind of large 10-year returns happened in the 1920s and they happened in the 1950s too.

This is how the stock market has always worked so far.

It goes in cycles. You get 10-15 bad years of 3%, and 10-15 good years of 15%, and you end up with 20-30 year returns of 9%.

The NEXT ten years are not likely to return 15% a year again. It would make total sense for the next 10 years to have poor returns (but no one knows for certain), but to say that we will never see a multi-year bull market of 15% a year again in our lifetimes is ludicrous.

It may be true (I will admit I can't predict the future either), but it's still a ludicrous statement to make.
I get your point, but I tend to agree with the thesis

https://www.thebalance.com/rolling-inde ... 09-4061795

Going back to 1973, the highest rolling returns were in the high teens, similar to the 16+% quoted last decade. I couldnt easily find farther back than that.

We have been in a period of 35 years of generally falling interest rates. Unless PEs go even sky higher those rates of growth cant likely repeat.

Now it is possible to have an epic crash and the experience such returns again.

I tend to think the writer meant we won't see those types of returns going forward based on today's levels. I don't think he was thinking about the market dropping by 67% and then going up 200% over the following 10 years, although it could happen.

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Re: The S&P 500 Goes Supernova

Post by raven15 » Fri Nov 30, 2018 10:17 pm

Random Walker wrote:
Fri Nov 30, 2018 4:16 pm
raven15 wrote:
Fri Nov 30, 2018 4:05 pm
Look at those beautiful normal distributions! I think Mandelbrot would write a chapter about the flaws in that piece.
Your point only AMPLIFIES the author’s points. Add left skew and fat tails to the implications of the essay, and thinks look worse.

Dave
:wink: Or it AMPLIFIES that you need to brush up on your Mandelbrot. A few things he might say:
-Obviously bootstrapping is a poor modeling technique. The market has memory, with ongoing external circumstances and past market motions themselves reverbating through subsequent market returns for decades. Sequence matters.
-The fact that it results in a bell curve makes it especially obvious that it is a poor technique when trying to make inferences about events that supposedly should have only a tiny chance of occurring.
-If you think normal distributions are normal, you will find yourself experiencing many once-in-the-history-of-the-universe market events throughout your life and always be wondering how that is possible.
-Times of good returns tend to run together for years, while volatility flashes into being.
-Superficial people can see that freakish fat tails occur a lot, but freakish tranquility for extended periods is also an inherent market characteristic, which doesn't happen to show up well on histograms of returns. Protracted tranquility should be expected to show up often.
-The market's motions scale over vast multiples of time scales. Remember how freakishly calm 2017 was? You should expect that same phenomenon to recur again and again over time scales from decades to minutes. So don't be surprised when it does.
I had a few others but I'm a little tired and can't remember them. Anyhow there is already a book on the topic. But to summarize, the article predictably fails to predict the future, but also disregards the past, fundamentally has no foundation on how markets behave, and is a pretty much failure at every level, though the last sentence or two seem OK. I didn't check but the author probably also nailed this sentence "A bit more precisely, the S&P 500 is up 352 percent from March 2009 through October 2018 while international developed stocks, emerging markets stocks and bonds are up 140, 142 and 39 percent, respectively."
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Re: The S&P 500 Goes Supernova

Post by HomerJ » Fri Nov 30, 2018 10:35 pm

JBTX wrote:
Fri Nov 30, 2018 9:18 pm
I tend to think the writer meant we won't see those types of returns going forward based on today's levels. I don't think he was thinking about the market dropping by 67% and then going up 200% over the following 10 years, although it could happen.
He said in "in our lifetimes". The next ten years are indeed likely to not be a repeat of the past 10 years.

Doesn't take a genius to make that assertion.

But he said "in our lifetimes". That statement right there disqualifies him from being taken seriously by anyone, ever.

(Did he qualify that statement by saying "I'm talking about us 85 year olds?")
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Re: The S&P 500 Goes Supernova

Post by JBTX » Fri Nov 30, 2018 10:58 pm

HomerJ wrote:
Fri Nov 30, 2018 10:35 pm
JBTX wrote:
Fri Nov 30, 2018 9:18 pm
I tend to think the writer meant we won't see those types of returns going forward based on today's levels. I don't think he was thinking about the market dropping by 67% and then going up 200% over the following 10 years, although it could happen.
He said in "in our lifetimes". The next ten years are indeed likely to not be a repeat of the past 10 years.

Doesn't take a genius to make that assertion.

But he said "in our lifetimes". That statement right there disqualifies him from being taken seriously by anyone, ever.

(Did he qualify that statement by saying "I'm talking about us 85 year olds?")
All due respect to you, but you really didn't repeat what he said accurately and in full context.

A bit more precisely, the S&P 500 is up 352 percent from March 2009 through October 2018 while international developed stocks, emerging markets stocks and bonds are up 140, 142 and 39 percent, respectively. What you might be surprised to know though (I certainly was) is that it’s almost impossible to simulate another same-length period where the S&P 500 had better risk-adjusted returns. In other words, saying the S&P 500 has done well during this period is a gargantuan understatement. As we will see, it’s done so well that it’s reasonable to ask whether anyone alive will ever experience a better performance period for U.S. large-cap stocks.

The last sentence may sound extreme, but I think returns data for the S&P 500 illustrates just how mind-blowingly astounding the post-GFC returns experience has been
It wasn't just about the level of returns, but it was risk adjusted returns, and compared to everything else.

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Re: The S&P 500 Goes Supernova

Post by heyyou » Fri Nov 30, 2018 11:57 pm

Some researcher wrote that doom and gloom forecasts attract more attention than optimistic ones.

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Re: The S&P 500 Goes Supernova

Post by willthrill81 » Sat Dec 01, 2018 1:27 am

JBTX wrote:
Fri Nov 30, 2018 10:58 pm
HomerJ wrote:
Fri Nov 30, 2018 10:35 pm
JBTX wrote:
Fri Nov 30, 2018 9:18 pm
I tend to think the writer meant we won't see those types of returns going forward based on today's levels. I don't think he was thinking about the market dropping by 67% and then going up 200% over the following 10 years, although it could happen.
He said in "in our lifetimes". The next ten years are indeed likely to not be a repeat of the past 10 years.

Doesn't take a genius to make that assertion.

But he said "in our lifetimes". That statement right there disqualifies him from being taken seriously by anyone, ever.

(Did he qualify that statement by saying "I'm talking about us 85 year olds?")
All due respect to you, but you really didn't repeat what he said accurately and in full context.

A bit more precisely, the S&P 500 is up 352 percent from March 2009 through October 2018 while international developed stocks, emerging markets stocks and bonds are up 140, 142 and 39 percent, respectively. What you might be surprised to know though (I certainly was) is that it’s almost impossible to simulate another same-length period where the S&P 500 had better risk-adjusted returns. In other words, saying the S&P 500 has done well during this period is a gargantuan understatement. As we will see, it’s done so well that it’s reasonable to ask whether anyone alive will ever experience a better performance period for U.S. large-cap stocks.

The last sentence may sound extreme, but I think returns data for the S&P 500 illustrates just how mind-blowingly astounding the post-GFC returns experience has been
It wasn't just about the level of returns, but it was risk adjusted returns, and compared to everything else.
Even if we're talking about risk-adjusted returns, large cap stocks from 2009-2018 only had a slightly higher Sharpe ratio (1.04) than from 1990-1999 (.95). To even suggest that this is as good as it gets, which the author was clearly doing, doesn't make sense to me.

Further, the fact that risk-adjusted returns were this high is due in no small part to there not being many pullbacks along the way (a couple of corrections and arguably one 'small' bear market). The period from 1990-1999 had higher absolute returns, and I would personally go for that over higher risk-adjusted returns when it comes to stocks every time.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Ca$h
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Re: The S&P 500 Goes Supernova

Post by Ca$h » Sat Dec 01, 2018 8:59 am

Interesting essay, what I took away from it is:

Every time period, every day is unique; therefore, I should get off this blog and go for a run before it starts raining again!

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Re: The S&P 500 Goes Supernova

Post by xb7 » Sat Dec 01, 2018 11:29 am

Every time period, every day is unique; therefore, I should get off this blog and go for a run before it starts raining again!
While not a frequent event, once in a while I wish this forum had a Facebook-style 'thumbs up'.

:thumbsup

mbasherp
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Re: The S&P 500 Goes Supernova

Post by mbasherp » Sat Dec 01, 2018 11:33 am

TVD wrote:
Fri Nov 30, 2018 8:50 pm
mbasherp wrote:
Fri Nov 30, 2018 8:19 pm
I realized today, after researching it to post in another thread, that the S&P500 forward PE is 16.

I don't know what the future will bring. But I don't agree with anyone who says we are near the end of some incredible run and doomed to mediocrity (or worse).
Not singling you out but I just do not understand this sentiment. The Fed Funds rate is only at 2.25% and was near 0 for nearly a decade. A month ago Powell said we are far from normalization, the market drops 5-10% and nearly every bull is going catatonic. Two days ago he said we are close to the range of normalization (which could be anywhere from 1-6 more 0.25% hikes) and we are back in a bull market.

Doesn't this say something about the state of the markets, state of the economy and obscene financial repression/manipulation that a historically low FFR and the prospect of minuscule interest rate hikes lead to such reactions? Something is truly wrong and I will gladly short this market. Granted, I could be wrong and will use appropriate risk management but (if I have time and my photoshop finally works) I will happily show some charts to show there is more downside to come.
You sound like a trader. I’m in my 30’s and buying stock funds that I don’t plan to sell for decades, if ever. I am not concerned by bulls going catatonic or bears growling. Realistically, a big scary bear market would be great for me. But I don’t think it’ll happen from here.

Forward PE is around 16 and trailing is around 20. If those were doubled or tripled, I might see things differently. Furthermore, in a few decades, I’d bet textbooks will not see this rise since 2009 as one big bull market. They will correctly realize that it ended in 2015 and a new one began in 2016. But that’s not really important, after all.

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Re: The S&P 500 Goes Supernova

Post by JBTX » Sat Dec 01, 2018 5:18 pm

willthrill81 wrote:
Sat Dec 01, 2018 1:27 am
JBTX wrote:
Fri Nov 30, 2018 10:58 pm
HomerJ wrote:
Fri Nov 30, 2018 10:35 pm
JBTX wrote:
Fri Nov 30, 2018 9:18 pm
I tend to think the writer meant we won't see those types of returns going forward based on today's levels. I don't think he was thinking about the market dropping by 67% and then going up 200% over the following 10 years, although it could happen.
He said in "in our lifetimes". The next ten years are indeed likely to not be a repeat of the past 10 years.

Doesn't take a genius to make that assertion.

But he said "in our lifetimes". That statement right there disqualifies him from being taken seriously by anyone, ever.

(Did he qualify that statement by saying "I'm talking about us 85 year olds?")
All due respect to you, but you really didn't repeat what he said accurately and in full context.

A bit more precisely, the S&P 500 is up 352 percent from March 2009 through October 2018 while international developed stocks, emerging markets stocks and bonds are up 140, 142 and 39 percent, respectively. What you might be surprised to know though (I certainly was) is that it’s almost impossible to simulate another same-length period where the S&P 500 had better risk-adjusted returns. In other words, saying the S&P 500 has done well during this period is a gargantuan understatement. As we will see, it’s done so well that it’s reasonable to ask whether anyone alive will ever experience a better performance period for U.S. large-cap stocks.

The last sentence may sound extreme, but I think returns data for the S&P 500 illustrates just how mind-blowingly astounding the post-GFC returns experience has been
It wasn't just about the level of returns, but it was risk adjusted returns, and compared to everything else.
Even if we're talking about risk-adjusted returns, large cap stocks from 2009-2018 only had a slightly higher Sharpe ratio (1.04) than from 1990-1999 (.95). To even suggest that this is as good as it gets, which the author was clearly doing, doesn't make sense to me.

Further, the fact that risk-adjusted returns were this high is due in no small part to there not being many pullbacks along the way (a couple of corrections and arguably one 'small' bear market). The period from 1990-1999 had higher absolute returns, and I would personally go for that over higher risk-adjusted returns when it comes to stocks every time.
That's all fair, but it doesnt change:

- The poster that characterized the post as idiotic did so by incorrectly characterizing the content in the article.

- the fact that the 90s was "close" doesn't negate the articles point. In fact, the fact that a decade leading up to the biggest US stock market bubble in history didn't match it (on a R-R basis) only supports articles point.

- sure, it is always easy to say, after the fact, that you would have preferred a riskier investment with higher returns. I'm sure we could find quite a few other subsets with higher risk higher return during 90-99. Nasdaq for instance.

- the fact that the market didn't go down dramatically 2009-2018 supports the articles point. You seems to indicate it takes away from it.

- When you consider the recovery came after the worst financial crisis in 75 years it somewhat lends to the notion that we won't see a similar run any time soon


I am not into predictions, so I take no position as to whether it will happen any time soon. But what the author said and way he said it was not at all unreasonable. He even addressed the fact that it seemed hyperbolic on the surface.

GrowthSeeker
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Re: The S&P 500 Goes Supernova

Post by GrowthSeeker » Sat Dec 01, 2018 5:57 pm

"The average 116-month period achieved an average monthly excess return of 0.67 percent."
which is an annualized excess return (over bonds) of 8.34%
(1.0067)^12 = 1.0834
1.0834 - 1 = 8.34%
Just because you're paranoid doesn't mean they're NOT out to get you.

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Re: The S&P 500 Goes Supernova

Post by willthrill81 » Sat Dec 01, 2018 7:07 pm

JBTX wrote:
Sat Dec 01, 2018 5:18 pm
- When you consider the recovery came after the worst financial crisis in 75 years it somewhat lends to the notion that we won't see a similar run any time soon
Fair enough.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: The S&P 500 Goes Supernova

Post by NotTooDeepLearning » Sat Dec 01, 2018 8:42 pm

Returns are correlated on the month and year levels. He appears to be saying that if we randomly select a sample with replacement from across a very long timeline, the correlations tend to disappear... because the sample was randomly selected.

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Re: The S&P 500 Goes Supernova

Post by boglesmind » Sat Dec 01, 2018 9:44 pm

shelanman wrote:
Fri Nov 30, 2018 4:07 pm
aristotelian wrote:
Fri Nov 30, 2018 4:02 pm
I'm so confused. I thought people who invested starting in 2000 were barely breaking even.
The S&P 500 is about double what it was in January of 2000. That doesn't take inflation into account, but it also doesn't take dividends into account.
Vanguard's S&P 500 index fund return including dividends since 1/1/2000 was about 5.5% annualized or $10K invested on 1/1/2000 would be $26,544 on 11/30/2018. This is slightly less than the return for the index itself (accounting for transaction costs). See MorningStar S&P500 Performance chart

Boglesmind

columbia
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Re: The S&P 500 Goes Supernova

Post by columbia » Sat Dec 01, 2018 10:14 pm

boglesmind wrote:
Sat Dec 01, 2018 9:44 pm
shelanman wrote:
Fri Nov 30, 2018 4:07 pm
aristotelian wrote:
Fri Nov 30, 2018 4:02 pm
I'm so confused. I thought people who invested starting in 2000 were barely breaking even.
The S&P 500 is about double what it was in January of 2000. That doesn't take inflation into account, but it also doesn't take dividends into account.
Vanguard's S&P 500 index fund return including dividends since 1/1/2000 was about 5.5% annualized or $10K invested on 1/1/2000 would be $26,544 on 11/30/2018. This is slightly less than the return for the index itself (accounting for transaction costs). See MorningStar S&P500 Performance chart

Boglesmind

That’s not encouraging for the risk “premium.”

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Re: The S&P 500 Goes Supernova

Post by AlphaLess » Sat Dec 01, 2018 10:59 pm

moghopper wrote:
Fri Nov 30, 2018 1:42 pm
I suspect that we could see this kind of return again.

We'd just have to have that kind of downturn first.
BINGO!
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Re: The S&P 500 Goes Supernova

Post by AlphaLess » Sat Dec 01, 2018 11:05 pm

He is not explaining how he bootstraped.
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Re: The S&P 500 Goes Supernova

Post by AlphaLess » Sat Dec 01, 2018 11:12 pm

nisiprius wrote:
Fri Nov 30, 2018 6:10 pm
Image

The blue curve is Total Stock, VTSMX.
The red curve is Total Stock shifted back in time about eighteen years, so that 2010-2018 overlay 1992-2000.

Yes, 2010-2018 is straighter (didn't feel like it during the 2011 correction), but 1992-2000 had higher average return. And, overall, it seems to me that the twenty-year period 1981-2000 was far, far better than 1999-2018.

So I don't see what was so once-in-a-lifetime great about the period since the global financial crisis.
But the author is making the argument about risk-adjusted returns, using the T-bills as an adjustment.

Because in the 2009-2018 period the short end of the treasury / interest rate curve was so low, we are getting higher risk-adjusted returns.

Does it really matter?

I don't know.
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: The S&P 500 Goes Supernova

Post by AlphaLess » Sat Dec 01, 2018 11:14 pm

Jags4186 wrote:
Fri Nov 30, 2018 5:38 pm
SP500 returned 17.37% annualized for the 25 year period ending 1999. $1000 turned into $54,000. Why is the current 10 year run considered that incredible?
Because someone wanted to write an article about it.
"You can get more with a kind word and a gun than with just a kind word." George Washington

shelanman
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Re: The S&P 500 Goes Supernova

Post by shelanman » Sun Dec 02, 2018 1:32 am

AlphaLess wrote:
Sat Dec 01, 2018 11:12 pm
Because in the 2009-2018 period the short end of the treasury / interest rate curve was so low, we are getting higher risk-adjusted returns.

Does it really matter?

I don't know.
I understand the concept of the risk-free return, and, by extension, the risk-adjusted return -- but I'm not sure that that's a real thing.

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