I wanted to take some time to recount you the tale of the U.S., from the roaring 20s until today. But I wanted to tell you this tell from the perspective of the S&P 500. And so after horrendous hours of research, I think I am ready to tell you this tale, and hopefully stay true to the S&Ps view of things. So here it goes!
The Roaring 20s
It all started in the 20s. The ROARING 20s. The roaring 20s were marked by stark improvements in social, political and economic modernization. The industrial revolution took off in the US and this created jobs, opportunities and, more importantly, disposable income for families across the US.
This was the first time in US history where more families lived in cities than on farms, and thus marked our beginnings of an industrialized century. This was also marked by a lot of social innovation, such as night clubs (well, Speakeasies really) and general outings of people to events, theatres, etc.
The Great Depression
The roaring 20s came to a grinding halt in the 1930s with the onset of the great depression. The great depression was a complex result of an over-inflated stock market, changes to governmental policies, bank failures and a general over-inflation of company and share prices.
Recovery Interlude
Between 1932 and 1936, the US began a slow recovery from the depression. However, the US was thrown back into a recession in 1936, with the stock market seeing a 316% increase over 1676 days.
This was abruptly halted at the end of 1936, beginning of 1937 when the US experienced yet another recession, that lasted until 1939. However, by 1939, the real GDP in the US was well above its pre-depression levels and, economically, the US had recovered from the depression.
Word War 2
After the 1936 US recession, September of 1939 marked the commencement of World War 2 for the US. This lasted until September of 1945.
While, for the most part, it looks like the US stock market stagnated through most of the war, interestingly the DOW increased 10% on the first day of trading after Hitler invaded Poland in 1939. Following the attack on Pearl Harbour, the market fell around 2.9% but regained those losses in one month. All in all, from the start of WWII to the end, the market saw an increase of 50%, so not really terrible and not really stagnation!
The Start of the Never Ending Bull Run
While there was an initial rally and correction following the termination of WW2, this period is traditionally marked as the start of the decades long bull run that we continue to be in today.
There was a “baby dip” in June of 1950, on the commencement of the Korean War, where the S&P fell roughly 10%. But this was quickly bought back up and continued to run up:
The Correction of 1953:
After the first few years of the commencement of the decade long bull run, the market experienced its, arguably, first minor “correction” that wasn’t the result of any major catastrophes, just simply a cumulative effect of various small things.
From Jan 1953 till about September of 1953, the S&P fell roughly 15%, bringing it back into its expected time series range for the time:
This was the result of such things as:
Back on Track, 1950s style:
After September 1953, the bottom was in and the S&P climbed up to approximately 119% over the course of 1065 days.
This is one of the most dramatic examples of economic expansion. Economic expansion marked the most part of the 1950s, with declining unemployment, inflation that was more under control as a result of the interest rate hikes in the early 1950s, and increasing disposable income by households.
In addition to this, there was great advancements in technology, with computers and processors being implemented in corporate and government contexts, and companies like IBM continually making advancements in this industry.
Various Other Corrections:
Throughout the 1950s up until 1969, there were various corrections, all resulting from the general same uncertainties and concerns, i.e. Inflation, employment, Federal Reserve and other governmental policies and geopolitical conflict.
Its interesting that the same concerns that plagued the market in the 50s, 60s and 70s are still the ones affecting us today.
The “Lost Decade”
The Lost Decade started around the beginning of the 1970s, after a sustained bear market in 1969 (which lead to just over a 35% decline in the US stock market) and lasting till the start of 1980.
It was called the lost decade because the US stock market spent a decade in stagnation. The result of this was mainly due to high inflation (when you hear people say stagflation, it generally is referencing a similar situation to this). This lead to a whole load of other problems such as:
Along Came the 80s
Then came the 80s, complete with leg warmers, aerobic classes, health consciousness, “the Millennial children” and massive technological advancements.
At the start of the 80s, the market rallied about 50% in roughly 273 days:
More Uncertainty and Pandemics
Despite the strong start of the 80s, this was soon to be halted at the start of 1981. Nineteen-eighty-one was the onset of another correction. By 1981, the federal reserve had not let up. The US people were continually bombarded by persistently high interest rates. Additionally, the US economy was already in a recession at the beginning of 1981.
There was also ongoing concerns around this time with the HIV pandemic; however, this isn’t theorized to have been a major influencing factor in this correction as the general attitude of Government and institutions was apathy in this regard (as, by this time, it was known to only be a concern for Haitian immigrants, IV drug users and gay men *eye roll*). It wasn’t until 1984, when this presented more of a public concern once contaminated blood supplies lead to a massive epidemic in the US and Canada.
But, post 1981, as far s the market was concerned, smooth sailing, with the S&P climbing almost 200% in 1827 days (or approximately 5 years), marking an, on average, 40% a year increase.
The Flash Crash of 1987 (AKA, Black Monday):
October 19th, 1987 was marked by a sudden and severe decline in stock prices. The losses sustained on this crash were estimated at 1.71 trillion US dollars, as the market fell more than 20% in a single day. This was termed "Black Monday" (not to be confused with the awesome song Blue Monday by New Order.).
The photo of the papers in the air really got me. I had to laugh because I can relate. On really bad days I have been known to throw things in the air and be like "I'm done. I'M DONE!
The cause of this was thought to be the introduction of algorithmic trading model behaviour which then triggered mass investor panic, though, a tumble of this degree is likely to be multifaceted and never truly fully understood.
Various tech stocks during Black Monday, IBM fell over 20%, AMD over 30%, MSFT over 29% and AAPL over around 29%.
This was short lived however, and from then on was marked by the ever so famous dotcom bubble.
The Dotcom Bubble:
After black Monday, which also brought the S&P back into its anticipated time series range, the S&P return to normal and stable growth, reflecting the general economic conditions at the time. However, this was accelerated at the start of 1995 with the advent and rapid uptake of the world wide web.
From the start of 1995 till about March of 2000, the S&P saw exponential growth, rising approximately 250% over 1885 days or 5 years (average return of 50% a year).
This was marked by rapid technological advancements, euphoria and speculation and an excessive use of IPOs (despite most of them lacking profitability). While Euphoria and speculation sustained the market for an admirably long time, it came crashing down in the early 2000s when the lack of profitability of these IPO tech companies came to light (I am looking at you pets.com).
However, in 2000, as these enterprises slowly began to liquidate and go defunct, the market, too, made a dramatic correction of 50%, back to its expected range:
This lasted a total of 944 days, or about 2 years.
The Housing Bubble
And as the pendulum swings, we transition from one bubble to the next. Immediately following the dotcom correction, we then entered the housing bubble of the YTK era, where the market had a steady rise of over 100% in a span of 1826, or 5 years:
The housing bubble wasn’t solely to credit for this growth, as the US had also declared war on Iraq. As we saw from the events of WW2, war tends to be looked at positively by the market (*another eye roll*). This does economically make sense though, war = business and business = profits. For war to happen, we need industries to produce. If we look at LMT (a huge military and defence sector) during the period of 2003 until 2008, it outpaced the S&P by almost 100%!!
And RTX (a huge supplier of US defence) outpaced both LMT and the S&P, growing over 200% in this time:
But unfortunately this, too, had to end. And we all know how it ended.
The 2008 Crash
I won’t dwell on this, it’s the most stated, studied and discussed event in market history, so there really is no need to dwell. But to summarize, the increase in subprime mortgage lending lead to increasing defaults. Increasing defaults on banks that, themselves, were over-leveraged, lead to bank closures, which lead to a whole domino effect with the end result being an over 55% decline in the US stock market over 518 days, or roughly 2 years.
From there, we have since resumed the centuries long bull market and haven’t looked back. The brief COVID-19 Crash in 2020 actually led to a fairly decent correction back to the anticipated range of the S&P (a regression to the mean), but this was short lived:
Despite tumbling over 35% in a matter of days, this was simply bought right back up and climbed 123% in a matter of 701 days:
The results of this were likely attributed to the use of quantitative easing and the federal government monetary stimulus policies creating more money to inject into the market.
The 2022 Bear Market:
And finally, the 2022 bear market. I was reluctant to title it as such because some operate on the assumption that the bear market is still a thing, others operate on the assumption that it ended in 2023.
If we look at the S&P currently, this is where we stand:
If we are back in bull market territory and continue up (despite being outside of the time series mean), the 2022 bear market will be among the first bear markets in SPX history to not have undergone a regression to the mean (from a quadratic standpoint). But let’s look at it from a log-linear standpoint:
The bear market of 2022 failed to re-test the mean. So for us to continue up towards the 2 standard deviation mark on the log-linear scale, it will mark a historic event really, a bear market that accomplished, well, nothing haha.
Concluding remarks:
And that, my friends, is the history, AND FUTURE, of the US, as told by the S&P. I hope you took something away from this, but importantly, my purpose of sharing this history with you is so you can see how, regardless of the time, the market is always concerned about the same things. That is:
Its as true as time, nothing else matters to the market than the numbers. Perhaps its sad, perhaps its realistic, perhaps its reality, but it truly seems to be the only thing that has mattered historically and probably the key thing you should take away from this.
Another final note, is that all of our corrections have lead to a "regression to the mean", both on the loglinear scale and on the quadratic scale. So it is interesting to see that we have not "regressed to the mean" with our 2022 bear market.
Anyway, thank you for reading this lengthy post! Leave your comments, questions and critiques below.
Safe trades everyone!
The Roaring 20s
It all started in the 20s. The ROARING 20s. The roaring 20s were marked by stark improvements in social, political and economic modernization. The industrial revolution took off in the US and this created jobs, opportunities and, more importantly, disposable income for families across the US.
This was the first time in US history where more families lived in cities than on farms, and thus marked our beginnings of an industrialized century. This was also marked by a lot of social innovation, such as night clubs (well, Speakeasies really) and general outings of people to events, theatres, etc.
The Great Depression
The roaring 20s came to a grinding halt in the 1930s with the onset of the great depression. The great depression was a complex result of an over-inflated stock market, changes to governmental policies, bank failures and a general over-inflation of company and share prices.
Recovery Interlude
Between 1932 and 1936, the US began a slow recovery from the depression. However, the US was thrown back into a recession in 1936, with the stock market seeing a 316% increase over 1676 days.
This was abruptly halted at the end of 1936, beginning of 1937 when the US experienced yet another recession, that lasted until 1939. However, by 1939, the real GDP in the US was well above its pre-depression levels and, economically, the US had recovered from the depression.
Word War 2
After the 1936 US recession, September of 1939 marked the commencement of World War 2 for the US. This lasted until September of 1945.
While, for the most part, it looks like the US stock market stagnated through most of the war, interestingly the DOW increased 10% on the first day of trading after Hitler invaded Poland in 1939. Following the attack on Pearl Harbour, the market fell around 2.9% but regained those losses in one month. All in all, from the start of WWII to the end, the market saw an increase of 50%, so not really terrible and not really stagnation!
The Start of the Never Ending Bull Run
While there was an initial rally and correction following the termination of WW2, this period is traditionally marked as the start of the decades long bull run that we continue to be in today.
There was a “baby dip” in June of 1950, on the commencement of the Korean War, where the S&P fell roughly 10%. But this was quickly bought back up and continued to run up:
The Correction of 1953:
After the first few years of the commencement of the decade long bull run, the market experienced its, arguably, first minor “correction” that wasn’t the result of any major catastrophes, just simply a cumulative effect of various small things.
From Jan 1953 till about September of 1953, the S&P fell roughly 15%, bringing it back into its expected time series range for the time:
This was the result of such things as:
a) Rising inflation that lead to the Federal Reserving hiking interest rates (sound familiar?)
b) Economic adjustment growing pains: Shifting from wartime to peacetime economics causes some volatility and adjustments at the societal and market level.
c) Corporate earnings: With the result of war ending, some corporations which profited on the war efforts, started to fall short on earnings. This contributed to lack-luster earnings at the time.
d) Over-inflated valuations: I mean, has anything changed? All this dip buying lead to over-valuation in stocks.
Back on Track, 1950s style:
After September 1953, the bottom was in and the S&P climbed up to approximately 119% over the course of 1065 days.
This is one of the most dramatic examples of economic expansion. Economic expansion marked the most part of the 1950s, with declining unemployment, inflation that was more under control as a result of the interest rate hikes in the early 1950s, and increasing disposable income by households.
In addition to this, there was great advancements in technology, with computers and processors being implemented in corporate and government contexts, and companies like IBM continually making advancements in this industry.
Various Other Corrections:
Throughout the 1950s up until 1969, there were various corrections, all resulting from the general same uncertainties and concerns, i.e. Inflation, employment, Federal Reserve and other governmental policies and geopolitical conflict.
Its interesting that the same concerns that plagued the market in the 50s, 60s and 70s are still the ones affecting us today.
The “Lost Decade”
The Lost Decade started around the beginning of the 1970s, after a sustained bear market in 1969 (which lead to just over a 35% decline in the US stock market) and lasting till the start of 1980.
It was called the lost decade because the US stock market spent a decade in stagnation. The result of this was mainly due to high inflation (when you hear people say stagflation, it generally is referencing a similar situation to this). This lead to a whole load of other problems such as:
a) Increasing interest rates to combat inflation
b) Increasing Conflict during the Cold War.
c) Negative real returns (investors were not seeing any returns and overally negative returns on their investments over the course of a decade!), this lead to a lack of confidence and thus, in some cases, exoduses from the market.
Along Came the 80s
Then came the 80s, complete with leg warmers, aerobic classes, health consciousness, “the Millennial children” and massive technological advancements.
At the start of the 80s, the market rallied about 50% in roughly 273 days:
More Uncertainty and Pandemics
Despite the strong start of the 80s, this was soon to be halted at the start of 1981. Nineteen-eighty-one was the onset of another correction. By 1981, the federal reserve had not let up. The US people were continually bombarded by persistently high interest rates. Additionally, the US economy was already in a recession at the beginning of 1981.
There was also ongoing concerns around this time with the HIV pandemic; however, this isn’t theorized to have been a major influencing factor in this correction as the general attitude of Government and institutions was apathy in this regard (as, by this time, it was known to only be a concern for Haitian immigrants, IV drug users and gay men *eye roll*). It wasn’t until 1984, when this presented more of a public concern once contaminated blood supplies lead to a massive epidemic in the US and Canada.
But, post 1981, as far s the market was concerned, smooth sailing, with the S&P climbing almost 200% in 1827 days (or approximately 5 years), marking an, on average, 40% a year increase.
The Flash Crash of 1987 (AKA, Black Monday):
October 19th, 1987 was marked by a sudden and severe decline in stock prices. The losses sustained on this crash were estimated at 1.71 trillion US dollars, as the market fell more than 20% in a single day. This was termed "Black Monday" (not to be confused with the awesome song Blue Monday by New Order.).
The cause of this was thought to be the introduction of algorithmic trading model behaviour which then triggered mass investor panic, though, a tumble of this degree is likely to be multifaceted and never truly fully understood.
Various tech stocks during Black Monday, IBM fell over 20%, AMD over 30%, MSFT over 29% and AAPL over around 29%.
This was short lived however, and from then on was marked by the ever so famous dotcom bubble.
The Dotcom Bubble:
After black Monday, which also brought the S&P back into its anticipated time series range, the S&P return to normal and stable growth, reflecting the general economic conditions at the time. However, this was accelerated at the start of 1995 with the advent and rapid uptake of the world wide web.
From the start of 1995 till about March of 2000, the S&P saw exponential growth, rising approximately 250% over 1885 days or 5 years (average return of 50% a year).
This was marked by rapid technological advancements, euphoria and speculation and an excessive use of IPOs (despite most of them lacking profitability). While Euphoria and speculation sustained the market for an admirably long time, it came crashing down in the early 2000s when the lack of profitability of these IPO tech companies came to light (I am looking at you pets.com).
However, in 2000, as these enterprises slowly began to liquidate and go defunct, the market, too, made a dramatic correction of 50%, back to its expected range:
This lasted a total of 944 days, or about 2 years.
The Housing Bubble
And as the pendulum swings, we transition from one bubble to the next. Immediately following the dotcom correction, we then entered the housing bubble of the YTK era, where the market had a steady rise of over 100% in a span of 1826, or 5 years:
The housing bubble wasn’t solely to credit for this growth, as the US had also declared war on Iraq. As we saw from the events of WW2, war tends to be looked at positively by the market (*another eye roll*). This does economically make sense though, war = business and business = profits. For war to happen, we need industries to produce. If we look at LMT (a huge military and defence sector) during the period of 2003 until 2008, it outpaced the S&P by almost 100%!!
And RTX (a huge supplier of US defence) outpaced both LMT and the S&P, growing over 200% in this time:
But unfortunately this, too, had to end. And we all know how it ended.
The 2008 Crash
I won’t dwell on this, it’s the most stated, studied and discussed event in market history, so there really is no need to dwell. But to summarize, the increase in subprime mortgage lending lead to increasing defaults. Increasing defaults on banks that, themselves, were over-leveraged, lead to bank closures, which lead to a whole domino effect with the end result being an over 55% decline in the US stock market over 518 days, or roughly 2 years.
From there, we have since resumed the centuries long bull market and haven’t looked back. The brief COVID-19 Crash in 2020 actually led to a fairly decent correction back to the anticipated range of the S&P (a regression to the mean), but this was short lived:
Despite tumbling over 35% in a matter of days, this was simply bought right back up and climbed 123% in a matter of 701 days:
The results of this were likely attributed to the use of quantitative easing and the federal government monetary stimulus policies creating more money to inject into the market.
The 2022 Bear Market:
And finally, the 2022 bear market. I was reluctant to title it as such because some operate on the assumption that the bear market is still a thing, others operate on the assumption that it ended in 2023.
If we look at the S&P currently, this is where we stand:
If we are back in bull market territory and continue up (despite being outside of the time series mean), the 2022 bear market will be among the first bear markets in SPX history to not have undergone a regression to the mean (from a quadratic standpoint). But let’s look at it from a log-linear standpoint:
The bear market of 2022 failed to re-test the mean. So for us to continue up towards the 2 standard deviation mark on the log-linear scale, it will mark a historic event really, a bear market that accomplished, well, nothing haha.
Concluding remarks:
And that, my friends, is the history, AND FUTURE, of the US, as told by the S&P. I hope you took something away from this, but importantly, my purpose of sharing this history with you is so you can see how, regardless of the time, the market is always concerned about the same things. That is:
- Interest rates,
- Inflation,
- Geopolitics and economic policies,
- War; and
- Corporate earnings.
Its as true as time, nothing else matters to the market than the numbers. Perhaps its sad, perhaps its realistic, perhaps its reality, but it truly seems to be the only thing that has mattered historically and probably the key thing you should take away from this.
Another final note, is that all of our corrections have lead to a "regression to the mean", both on the loglinear scale and on the quadratic scale. So it is interesting to see that we have not "regressed to the mean" with our 2022 bear market.
Anyway, thank you for reading this lengthy post! Leave your comments, questions and critiques below.
Safe trades everyone!
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