Five for Friday
June 6, 2025
Robust Rally, Finding Average, Drawdowns, Inflation, and Punch Cards
1. Rally
The S&P 500 wrapped one of its best 40-day runs on Thursday, (top 10 of the last 75 years). The table to the right shows that historically, rallies this intense were followed by strong returns in the months that followed (2001 being the exception). The path forward may not be smooth, but momentum begets momentum for markets.
2. Average
Longer-term, things get trickier. I recently wrote on the idea that even when the market is delivering average long-term returns (about +10% annually), the path to average returns rarely feels average. From Jan. 1, 2020 through the Apr. 8, 2025 low, for instance, the S&P 500 returned 10% a year—an average performance that took three bear markets and a global pandemic to achieve. On the heels of the historic 40-day rally noted above, what would it take for the stock market to return +10% annually for the 2020s? As of the end of May, the S&P 500 had nearly doubled since the beginning of the 2020s, with an annualized return of almost +14%. That means we’d need lower returns from here to reach +10% annualized by Dec. 31, 2029. Put another way, we’d need about +6% a year for the rest of the decade to attain “average.” There’s no reason to expect an average return over a particular calendar decade, but after the market’s recent recovery (and strong performance over the last 15 years) a period of below-average returns is possible, especially with today’s somewhat rich stock market valuations.
3. Pain/Gain
I highly recommend this recent study on historical drawdowns and recoveries for stocks from Morgan Stanley’s Michael Mauboussin. The study found that of the ~28,600 U.S. companies listed publicly from 1926 to 2024, nearly 60% failed to match the returns of Treasury bills, destroying $10.1 trillion in value through Dec. 2024. The other 40% created $89.5 trillion in value. Of the net value created (+$79.4 trillion), 90% was produced by just 2% of publicly listed companies. The top 6 individual stocks alone accounted for 22%, or $17.1 trillion. Mauboussin writes, “had you been astute enough to buy and hold any of these super wealth creators, you would have suffered meaningful drawdowns....their average maximum drawdown was -80.3%, similar to the average of the full sample.” As they say, no pain…no gain.
4. Housing
Inflation is measured by tracking changes in the price of a basket of commonly-purchased goods and services. Over one-third of that inflation basket is shelter, making housing costs the single largest contributor to the country’s rate of inflation. Therefore, housing is a critical factor in what the Fed does with interest rates. Per Redfin, there are 1.9 million home sellers in the U.S. and 1.5 million home buyers, the largest gap since at least 2013. Such a wide imbalance—paired with a cooler labor market—is likely to put downward pressure on home prices. Shelter inflation sits at +4% year over year, but Redfin expects home prices to drop by 1% by the end of 2025 (rents are already falling). As of today, the Fed is only expected to cut interest rates two times in 2025. But if housing prices pulls core inflation down, the Fed might have room to cut rates further—and a weakening labor market might necessitate that move sooner rather than later.
5. This week
in 1887, Herman Hollerith applied for a patent titled, “Art of Compiling Statistics.” His punch cards stored “digital” information via the presence/absence of holes on cardstock, a method of “Big Data” collection proven by the success of the 1890 census. Hollerith’s Tabulating Machine Co. became IBM in 1924. Remarkably, coders still typically limit programming line lengths to 80 characters—a practice derived from the 80 columns on an original IBM punch card.
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