Market Returning to Historical Norms
Thursday, July 20th, 2006
By Mitchell Clark, B.Comm. for Profit Confidential
It really is tough to figure where this stock market is going. If you look at a 20-year chart of the S&P 500, you’ll see a most peculiar depiction of stock prices.
You can easily see the stock market crash in 1987, but when compared to the price appreciation of stocks from 1995 to 2000, then the subsequent fall, the crash of 1987 looks like a minor blip. It’s as if the crash was just one down day in the market’s history.
From 2000 to 2003, the market’s negative price action is clearly illustrated, losing almost half its worth from the highs set during the Internet bubble. In 2003, the market reverses and the S&P 500 begins a solid recovery to where it is now.
Technical analysts looking at this index chart are at a loss for an explanation. The market’s price action hasn’t really followed any traditional type patterns, and there doesn’t seem to be any rationality to it.
This leads us to today’s market environment where I really don’t have a defined view as to where stock prices are headed over the near-term. As a full-time market observer, I usually have a good sense about stock market sentiment and its overall direction. In the current environment, it is a toss up as to where prices might head.
I mentioned before in this column that I felt that the market is regressing towards its mean. After all the market’s ups and downs over the past decade, individual investors’ enthusiasm for the stock market is waning. Interest rates have gone up and yields from money market instruments are providing competition for stocks.
So, the stock market has evolved, and yet it is returning to its usual self. My best guess as to the future is that average returns from investing in stocks will be much more modest than they were over the last ten years. The stock market really is returning to its historical norms.
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Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.
