Santoli: Bull market on sale for 2014 prices?

Published Mon, Feb 1 20167:00 AM ESTUpdated Sat, Oct 14 201710:44 AM EDT

In falling markets, stock prices not only go down in price — they also go back in time, dropping to values first reached on the way up. The stock market setback of 2016 has traveled farther back in time than most declines of similar magnitude. With the S & P 500's trip to and below 1,900 for much of January, it was knocking around levels first reached in early 2014. At the worst of the sell-off on Jan. 20 – when the index sank to 1,812, 15 percent below its 2015 high — the S & P reached a level first touched in December 2013. This retreat has generated plenty of largely semantic front-porch arguments about whether it's still a bull market if no net progress has been made in nearly two years. But fewer are asking the more practical question: How would an investor have done over time by buying the market when it sat at the same level of nearly two years earlier? Pretty well. Michael Batnick, director of research at Ritholtz Wealth Management, obliged my request to run the numbers on all prior instances when the S & P 500 was within 2 percent of its level from 21 months earlier, which is where it is now. There were only 44 prior instances since 1928 when this was the case, out of more than 1,000 rolling 21-month periods. In 39 cases, the S & P 500 was up one and three years later (coincidentally, it was the same 89 percent win rate for both periods). The average return over one year was 14 percent, versus 8 percent for all one-year periods since 1928. After three years, the index was up an average of 36 percent, compared with 23 percent in all periods. Batnick notes that the average one-year gain of 18.1 percent when the market is up the following year is right in line with the historical average in all periods of rising stocks. "It's sort of interesting that the average change when positive and when negative for one-year periods is basically right in line with historical standards. What is pushing up the average change is how often these one-year periods are positive," he said. The times when buying stocks at prices of nearly two years earlier didn't work well in the subsequent year came in three time clusters: In 1939 and 1940, near the start of World War II; in 1948, ahead of a bad post-war recession; and in 1969, when an overvalued stock market was running into another U.S. recession. Read More Trade it: Where to hide during recessions There are a couple of obvious reasons to push back against these largely comforting odds of success buying stocks back at early-2014 prices. One: The results are random, produced through the study of arbitrary criteria. Two: Markets are dealing with tougher