S&P 500 Up 26 Percent, But This Is An “Ordinary” Rally: JPMorgan

The S&P 500 (INDEXSP:.INX) is up 26% year to date, and most people agree that the market has had a tremendous year, but according to historical analysis from JPMorgan Chase & Co. (NYSE:JPM)’s Thomas J Lee, it’s actually been an “ordinary” rally.

Double-digit market gains

“Since 1897 about one-in-three years has seen the market rise greater than 20% (34 out of 116 instances). In fact, double-digit market gains are surprisingly common. For instance, there are 57 years when the market was up more than 10% and only 19 years up single digits,” writes Lee. “The YTD gain, taken by itself, is not a sign of exuberance, but quite typical.”

annual price performance JPM S&P 500

S&P 500: Historical precedent bodes well for the future

Lee gives further reasons to be optimistic in both the short and long-term. He notes that December is a historically strong month, and that the market is up 80% of the time when the year has been rallying up until that point. Looking towards next year, he says that the 2013 “wealth effect” should hit $8.8 trillion, which implies an additional $440 billion (5%) in consumption next year. Continuing with the historical outlook, Lee recommends focusing on quarter-to-date leaders because November momentum translates into a strong December most of the time.

Like Lee, most analysts are bullish on equities for 2014, but Lee goes further arguing that the S&P 500 (INDEXSP:.INX) is actually due for further upward re-rating because the market is trading at a discount to high-yield bonds. The conventional wisdom is that re-rating has largely played itself out, and that companies need to improve earnings to continue pushing their stock prices up. Some people even argue that the re-rating has gone too far and that we should be concerned about a valuation bubble. Even if the market tends to go up in double-digit bursts, it also gets hit with a downward correction a fair amount of the time, and many people think we’re overdue.

HY v S&P 500 1113

In light of the recent holiday, Lee says that he’s thankful for four things this year: we haven’t had a major correction so far this year, the Fed has kept its credibility intact, Washington avoided a debt ceiling disaster, and “it is now socially acceptable to be ‘bullish’.”



About the Author

Michael Ide
Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.