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By: Alex Carrick on December 8th, 2016

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The Unbelievable Saga of U.S. Stock Market Indices

Economic News

The Dow Jones Industrial, S&P 500 and NASDAQ stock market indices all set new record highs in November 2016.

2016 12 08 Stock Markets Graphic

In Graphs 1 through 3, the ‘actual’ index results are shown along with fitted exponential trend lines. (Graph 4 is similar in structure, but it is for the chief stock exchange in Canada and it will be analyzed further along in this article.)

In each case in Graphs 1 through 3, there was a flattening of the ‘actuals’ curve in 2015 that lowered it below the continually rising trend path.

More recently, however, the ‘actuals’ results have been moving upwards again in the same fashion as the accompanying trend patterns.

Investors have been enthusiastically embracing President-elect Trump’s proposals to lower corporate taxes and cut regulations.

The R2 values for the exponential growth curves overlaid on the actual index results in Graphs 1 to 3 are remarkably good. R2 is an econometric term that refers to the degree of ‘fit’ between two (and often more) data sets. It can vary between 0.00 (no relationship) to 1.00 (a perfect relationship). A reading above 0.90 indicates an outstandingly solid correlation.

The ‘fit’ for the NASDAQ index (0.95) is best, but both the S&P 500 (0.94) and the DJI series (0 .92) rate congratulations as well.

A prime advantage of placing an exponential curve on top of actual results is that it can then be used to calculate annual growth rates.

The last trough period for all three U.S. indices occurred in the early months of 2009.

Since then, and as of November’s closing bell, the DJI has been +171%; the S&P 500, +199% (or three times as high); and NASDAQ, +286% (or almost four times as great).

The annual growth rate of the DJI over the nearly eight years from 2009 to the present has been +10.8%, which is stunningly favorable. No one, as a depositor, is realizing that rate of return in a bank savings account. Nor is anyone doing as well from holding a government bond.

Nor have house prices been appreciating to anything like the same degree. The latest year-over-year gain in the Case-Shiller national resale home price index was +5.5%.

Only briefly, in late 2013 to early 2014, did the nationwide Case-Shiller index rise by a double-digit percentage change.

The more broadly-based S&P 500, at +12.7% annually, can boast that it has done even better than the DJI.

What about NASDAQ? High-tech stocks have added the cherry to the top of the sundae. At +15.9% per year, NASDAQ has handily surpassed its siblings in setting a blistering pace.

Sentiment among investors has finally shifted towards acceptance of a higher interest rate regime. The assessment of most analysts is that the banks and insurance companies comprising ‘financials’ will benefit from elevated yields. They need to earn the funds (i.e., from government debt, etc.) to meet previously made annuity and pension payment commitments.

A gradually climbing federal funds rate will add further support to the value of the U.S. dollar. Such an outcome also has the potential to be positive for stock prices. Investors in other countries looking to put money into U.S. shares will be reassured that their capital appreciation won’t be diminished by a currency transaction when it comes time to sell.

But, of course, for companies engaged in the construction sector, higher interest rates are rarely welcome, which just goes to show that whenever the economy ‘giveth something’, it almost always ‘taketh away’ as well.

Graph 4, sets out the performance of the Toronto Stock Exchange. The R2 value since the Great Recession for the TSX index has been a weak 0.59. There isn’t much of a ‘fit’. The best one can say is that the TSX has been increasing at about a +4.4% rate annually since the start of 2009.

That’s not the end of the story, though. Over the past year, the TSX has actually outperformed the DJI, S&P 500 and NASDAQ. As at the end of November, the TSX was +12.0% year over year, whereas the DJI was +7.9%, the S&P 500 +5.7% and NASDAQ, +4.2%.

The TSX has also led in a comparison of close-of-day results on November 30th versus 52-week lows. The TSX was +30.8%; NASDAQ, +26.5%; the DJI, +23.8%; and the S&P 500, +21.5%.

A long-awaited end to the oil price doldrums and the first stirrings of revival in some other key commodity markets, plus a Canadian banking sector in which some record high earnings are being reported, are all helping to prod the TSX out of its prolonged lethargy.

Still, the TSX which is only +86% versus its trough position in February 2009, has a lot of catching up to do to join its American cousins in celebration.

Graph 1: New York Stock Exchange – Dow Jones Industrial (30)
New York Stock Exchange – Dow-Jones Industrials (30)
The charts show month-end closing figures. The latest data point is for November 30, 2016.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: ConstructConnect.
Graph 2: New York Stock Exchange – Standard and Poor’s (500)
New York Stock Exchange – Standard and Poor’s (500)
The charts show month-end closing figures. The latest data point is for November 30, 2016.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: ConstructConnect.
Graph 3: NASDAQ Composite Index
NASDAQ Composite Index
The charts show month-end closing figures. The latest data point is for November 30, 2016.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: ConstructConnect.
Graph 4: S&P/TSX Composite
Toronto Stock Exchange
S&P/TSX Composite Toronto Stock Exchange
The charts show month-end closing figures. The latest data point is for November 30, 2016.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: ConstructConnect.