2015 vs. 2011: A Stock Comparison, and What It Could Mean for 2016

 

The best way to demonstrate just how eerily similar the stock market in 2015 has been to 2011 is not to try and explain it, but to simply show it to you.

So take a look at the two charts below for a comparison of the S&P 500’s annual performance in 2011 and 2015. The resemblance is uncanny:

S&P 500 Performance 2011


S&P 500 Performance 2015


They paint an almost identical picture: a strong first two months, a big dip in March, a push higher in April and May, a steep drop-off in July and August, a strong bounce-back in October, and volatility thereafter.

The end result in 2011 was a flat market. With two trading weeks still to go this year, the index is down a mere -0.6% as of this morning. Not much difference.

Why is a comparison of stocks in 2011 important? Because of what happened next.

The following year, in 2012, stocks were back with a vengeance. The S&P was up 13.4% that year, marking a change in momentum that would last all the way through 2014. The index closed 2011 at 1,257, exactly where it started the year. Entering 2015, it was up to 2,058.

So, technically speaking, one could argue that 2011 was simply a consolidation year for stocks in the midst of what is now a seven-year bull run—an extended deep breath before another long push higher. Is that what the market is doing this year? The charts sure look the same. But, of course, the circumstances and financial backdrop are totally different.

For example, the U.S. unemployment rate is down to 5% as of last month. At the end of 2011, it was 8.5%. That’s a plus for 2015.

However, today the S&P trades at 21 times earnings. At the end of 2011, the P/E was less than 15. It’s the highest valuation the index has carried into a new year since 2009. Gulp.

U.S. gross domestic product (GDP) growth is currently 2.2%. Four years ago, it was less than 2%. Advantage 2015.

On the other hand, corporate profits are on track for negative growth (-0.5%) in 2015, with analysts projecting a third straight quarter of negative growth among S&P 500 companies in the fourth quarter. That hasn’t happened since 2009. In 2011, large-cap earnings grew more than 9%. That’s a bad trend heading into 2016.

Perhaps the biggest difference between 2011 and 2015 is the Fed. Four years ago, the Fed had just wrapped up a second round of monetary easing, and would start a third round of bond buybacks in September 2012. Today, the Federal Reserve is two years removed from pulling the plug on quantitative easing, and is in talks literally as I write this to presumably raise interest rates from zero for the first time in seven years.

Thus, the artificial enhancements supporting the U.S. economy, and by proxy U.S. stocks, are all but gone. That has investors fearing the worst—that the market, without historically low interest rates backstopping it, may continue its recent decline well into 2016. Or at least that’s what much of the mainstream media will have you believe.

In actuality, investor fear—as measured by the VIX, a.k.a. the investor “fear gauge”—is roughly the same now as it was four years ago. Consumer confidence is much higher (91.8) now than it was entering 2012 (about 75), housing starts are about 50% higher, and automobile sales are about 30% higher.

Add in the slightly improved GDP growth and unemployment being at a seven-year low, and the U.S. economy has a lot going for it now that it didn’t have four years ago. That’s why the Fed is (supposedly) raising interest rates in the first place—because Janet Yellen and company feel confident that the U.S. economy is healthy enough to continue growing even with higher rates.

That brings me back to the stock charts. It’s easy to get bogged down by all the details. Some economic and market factors are better now than they were four years ago; some are worse. But in a strict stock comparison to 2011, the 2015 chart looks about the same.

Does that mean 2016 will be as fruitful for investors as 2012? Not necessarily. But history is decidedly on next year’s side.

According to our resident growth expert Mike Cintolo, the S&P has risen an average of 18.2% in years that followed a year in which the return was between -5% and +5%. The smallest return, in fact, was in 2012 following a flat 2011. Such flat market years have only occurred six times since 1965, but all six times, stocks took off the following year.

Here’s what Mike wrote in his recent issue of Cabot Growth Investor:

“History tells us that, in any given year, the market tends to finish up or down by a healthy amount—it’s highly out of the ordinary for it to make no progress. So after a year like 2015, when the indexes haven’t gone anywhere, the odds are stronger that the following year will see a big move—and that move will be up.”

Charts tell interesting stories, and sometimes those stories are more relevant than any economic data point, P/E ratio or Fed decision. This year’s chart tells us there’s very good reason to be bullish about 2016. 

*Follow me on Twitter, @Cabot_Chris

Read more from Cabot Investing Advice:

Santa Claus Rally and the January Effect

Five Market Drivers that are Much More Important than the Fed

Why Bold Market Predictions are Meaningless


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