In 1943, Milton Bradley introduced a board game called Chutes and Ladders, inspired by an 18th century game from India. The object is to make your way step-by-step from the bottom of the game board to the top, while you periodically come upon ladders that help you advance more quickly, or fall into chutes that set you back, sometimes a great distance. In the Indian game, ladders represent the good karma from following the path of virtue (faith, reliability, generosity, knowledge), while the numerous chutes represent the bad karma that follows from taking the path of vice (disobedience, debt, vanity, greed). In the Milton Bradley (now Hasbro) version, there are illustrations of children doing good or helpful actions at the bottom of each ladder, and illustrations of the happy consequences at the top. In contrast, the top of each chute depicts children doing irresponsible things, with an illustration of the unfortunate consequences at the bottom. On October 9, 2007, the S&P 500 reached a bull market peak, which was followed over the next 18 months by a stunning market plunge which wiped out more than half of the market capitalization of U.S. stocks. As any number of weekly comments at the time should demonstrate, the crisis was the fairly predictable result, albeit of uncertain timing, of reckless speculation in the housing market, irresponsible yield-seeking among lenders, exuberant overvaluation in the equity market, overbullish sentiment, failure of investors to consider the cyclicality of profit margins, and a variety of other factors. Investors plunged down a terribly deep chute. While we avoided a great deal of damage, even our fairly cautious response to improved valuations and periodic improvements in market action in late-2008 was punished, but we slipped down a comparatively smaller chute.
Since early 2009, assisted by the largest fiscal and monetary intervention in U.S. history, coupled with changes in U.S. accounting rules, investors have essentially climbed back to rejoin us. The S&P 500 is now about even with the Strategic Growth Fund (within a fraction of 1%) since the 2007 peak. It is not clear that the policies contributing to this recovery have been particularly virtuous, driving the U.S. debt/GDP ratio toward 100%, leaving the Federal Reserve leveraged over 54-to-1, and bringing the valuation of the S&P 500 to the point where we estimate prospective total returns of just 3.8% annually for the index over the coming decade. Given the assumptions required to justify further risk-seeking and elevated valuations (permanently wide profit margins, sustained monetary distortions, further sovereign bailouts, avoidance of state and municipal strains, and other factors), there's a good chance that investors have simply clawed their way to the top of another chute, but that remains to be seen.
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Since early 2009, assisted by the largest fiscal and monetary intervention in U.S. history, coupled with changes in U.S. accounting rules, investors have essentially climbed back to rejoin us. The S&P 500 is now about even with the Strategic Growth Fund (within a fraction of 1%) since the 2007 peak. It is not clear that the policies contributing to this recovery have been particularly virtuous, driving the U.S. debt/GDP ratio toward 100%, leaving the Federal Reserve leveraged over 54-to-1, and bringing the valuation of the S&P 500 to the point where we estimate prospective total returns of just 3.8% annually for the index over the coming decade. Given the assumptions required to justify further risk-seeking and elevated valuations (permanently wide profit margins, sustained monetary distortions, further sovereign bailouts, avoidance of state and municipal strains, and other factors), there's a good chance that investors have simply clawed their way to the top of another chute, but that remains to be seen.
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