The S&P 500 has experienced price level growth in the 1990’s through today (Oct 10) that is substantially greater than the price growth it experienced in the 40 years after 1950.

We’ve all partied in the growth rates of the last approximate 20 years, but the party may be over.

Is it possible that the index could cumulatively revert to the growth rate channel characteristic of the 1950 to 1990 period?  Yes, it is possible, but we don’t know if its probable.

With the ongoing growth “handoff” to the developing economies described by El-Erian in his book, “When Markets Collide: Investment Strategies for the Age of Global Economic Change“; and with the structural problems and changes unfolding in the developed economies, it would not be crazy to consider that the S&P 500 could revert to former, lower price growth rates.

If the index (proxies SPY and IVV) did revert cumulatively to former growth rates, it would be priced generally in the range of less than 900 to more than 400.  That would translate roughly to SPY $90 to $40.

The chart below shows the S&P 500 from 1950 in semi-log format and marks the approximate 1950 through 1990 growth channel with red and green boundary lines extended out to today.

click image to enlarge

SPY is at $88.50 today.  It was over $120 a month ago.  It has been over $150.  If we revert to the general 1950 to 1990 growth rate channel, we could see SPY trading regularly below $90, and in particularly bad scenarios as low as $40.

Another constant growth rate study we did from 1927, also suggested a mean reversion possibility to the general 800 to 400 level for the S&P 500 (SPY $80 to $40).

We are not trying to say the sky is falling, and we are not predicting S&P 400.  We certainly hope prices don’t go that way.  However, we are not willing to deny the possibility of an outcome that presents itself so clearly, simply because it is unpleasant and would be quite damaging.

We must consider all reasonable possibilities and their implications for our investment behavior.

How each investor would deal with that possible growth rate shift would vary greatly, ranging from avoidance through cash or alternative exposure, to hedging, to shorting, to spending it to eliminate the worry.

What do you see as reasonable possibilities?  How would you prepare yourself to be aware of growth rates moving to a new lower range?  How would you cope?

Richard Shaw
QVM Group LLC

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