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Bull or Bubble?

Posted By Barry Ritholtz On December 5, 2013 @ 1:08 pm In Investing,Markets,Quantitative | Comments Disabled

Annual_Price_Performance_800px [1]
Source: 361 Capital [2]

 

This chart comes to us via Blaine Rollins [2] of 361 Capital. I find it provides great context for the current markets, especially given the amount of bubble chatter we hear these days.

How common are double-digit equity gains? How often do we see markets up 20 percent or more in a given year?

As it turns out, when markets are in the green, double-digit gains are the norm. Only one in four years where markets are positive do we actually record single-digit gainers. Indeed, three out of four positive years (19/76 or 0.25 percent) see gains that are in the double digits.

This year, the S&P 500 is up about 25 percent. How common are 20 percent plus years? As the distribution above shows, 20 percent or greater gains are surprisingly common. We have these sort of hot years about 30 percent of the time (34/115 or 0.295 percent of the time) — that’s almost one in three years since 1897 where we have seen markets up more than 20 percent.

We have been overdue for a correction of 10 percent or more for a while now. There is little doubt during this long market run, stocks have gotten pricier than they were, and sentiment has moved from disliking equities to warming up to them to becoming quite frothy. But none of these metrics suggest that the market is on the verge of crashing or even entering a bear market (down 20 percent or more).

Of the myriad reasons we could possibly see a correction beyond the pullback of the past five days, the markets’ year-to-date gains of double digits or even 20 percent are not one of them.

 

Originally published here [3]


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URLs in this post:

[1] Image: http://www.ritholtz.com/blog/wp-content/uploads/2013/12/Annual_Price_Performance_800px.jpg

[2] 361 Capital: http://www.thereformedbroker.com/2013/12/03/361-capital-weekly-research-briefing-67/

[3] Originally published here: http://www.bloomberg.com/news/2013-12-05/bull-or-bubble-ritholtz-chart-.html

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