How Did Stocks Really Perform Since Oct. 2007?
We're over the hump! It's the last trading day of the first quarter, and stocks went out on a high note, with the S&P 500 gaining 0.4%, finally achieving a new all-time (nominal) high. Setting the new high was no walk in the park. On top of the fact that it has taken nearly five-and-half years to get here, the market appeared to be extremely reluctant to push the index into uncharted territory -- it closed within 1% of the Oct. 2007 high 12 times this month, which suggests the level was psychologically important.
The narrower, price-weighted Dow Jones Industrial Average also finished up 0.4%. Meanwhile, option traders cheered the market's advance by pushing the VIX Index , Wall Street's "fear gauge," down 3.4%, to close at 12.70. (The VIX is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days.)
Two graphs to understand today's new high
With the S&P 500 making a new high today, we know that the index return is basically a donut over the nearly five-and-half year period beginning Oct. 9, 2007 through today. But there's more to it than that:
The chart shows that, when one includes reinvested dividends (orange line), the S&P 500's return over this period rises to 13.2%. Not a great result over that length of period, by any means, but it's certainly an improvement. That's the good news -- but here comes the hammer: Inflation (red line) eats away virtually that entire income return. All in, we're more or less back at a flat return.
Here's another angle worth pondering: Although the S&P 500 is often used as a proxy for the broad market, it's essentially a large-cap index. A much better measure of broad equity market performance is the Wilshire 5000 Index, which contains over 5,000 equities. Here's how it stacks up:
The Wilshire 5000 (blue line) beats the S&P 500 (orange line) by nearly three percentage points over this period. To see why, consider the performance of the Wilshire 4500 Completion Index (red line), which is constructed from the Wilshire 5000 minus the stocks in the S&P 500 -- it smashed the S&P 500 by 12 percentage points. This indicates that mid- and small-cap stocks have outperformed large-cap stocks since Oct. 2007.
Will today's milestone usher in a new leg in the rally that began in March 2009? That's impossible to predict, but the market has got the monkey of the old high off its back, which is another sign that investors' risk aversion continues to normalize, albeit at a glacial pace.
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The article How Did Stocks Really Perform Since Oct. 2007? originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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