Historical S&P 500 Graph Shows Bubbles

To my remembrance today’s post represents a first for the “What My Intuition Tells Me Now” blog: a graph!  Specifically, a graph that shows the adjusted closing prices of the Standard & Poors 500 Index from January 1950 through 22 June, 2011.

The reason I want to put this graph up is that very typically graphs of such a long history are rarely shown.  More typically graphs will go back 10 years at the most.  The problem with this is that it obscures just how bizarre the world of investing has been since the early 1980s.

Without further adieu…

Things to focus on the:

• Massive ascent in the stock market starting at about 1984.
• Stock market “crash” of October 1987, seen as a straight downward drop in the level of the S&P 500.
• Gigantic dot.com bubble, culminating in a gigantic peak circa 2000.  Look at the elevation compared to anything prior to in the preceding 50 years!
• Unprecedented dot.com crash whose absolute wipe out of around 700 points which, had it occurred at the beginning of the dot.com bubble would have wiped out all of the S&P 500’s historic gains!
• Gigantic credit/real estate bubble, culminating in a gigantic peak circa 2008.  Look at it in comparison to the dot.com bubble, just 8 years prior.
• Great recession of 2008-2009 – the worst recession since the Great Depression – that took out 12 years worth of stock market gains!
• Subsequent rise in equity prices that has brought us to where we are NOW.

To me it is obvious that the stock market has experienced unprecedented volatility in ascent and descent in the last 30 years.  What might be some of the causes of this ascent and descent?

• Baby boomers being told for 40+ years that the stock market is where they should “save” their money.  This extra liquidity pumped into assets like mutual funds have found their way overwhelmingly in the stock market.
• An actual increase in the value of information, and hence the overall economy, due to the creation of the Internet.  The cost of information discovery has never been cheaper; and information is one of the primary sources of power on the planet.
• Crazy credit expansion on the part of the Federal Reserve that has pumped crazy amounts of cash into the economy, starting around 2001.
• Computers now dominate trading and they enter gigantic (as compared to the trade sizes of yesteryear) buy and sell orders automatically and by the microsecond!  This lack of human eye contact with trades has resulted in wild swings in the value of the stock market on an intraday and interday basis.

There are more reasons that could be named, but these, to my mind, are the biggies.

My overall point is: contemplation.  Contemplation of this image, unadulterated with statistical analysis.  For me, it demonstrates unequivocally that we have been living in strange stock market times for three decades.

Jason