US stocks up 53% from March 9th low, still 42% below record high

The S&P 500 gained 53.2% in the 6 months since the March 9th bottom.  Over the same time frame, the NASDAQ gained 57.1%.  These are among the sharpest gains ever recorded for either index (record for the NASDAQ.)  However, the S&P 500 still remains 34.3% below the October 7th, 2007 record high, and the NASDAQ remains 29.02% below the October 2007 high and 59.9% below the March 2000 record high.  YTD the S&P 500 is up 17.0%

Bottom line, both indices need to increase by 50% just to get back to the level of October 2007.  We think those levels will be achieved in the next 3-5 years, which implies annual rates of return of 14.4-8.4%.  The long term average return of stocks is 8-10%/year, so our forecast would be straddle the long term average rates of return.  However, the average rate for return in stocks for the current decade is negative 2.3%/year for a cumulative loss of 20.2%.  There have been three other periods of negative ten year returns in the US stocks over the last 200 years.  Each of those periods was followed by a decade of excess returns.
Yellow lights on the instrument panel

The experience of the last year made us feel like the pilot of a business jet cruising along happily at 40,000 feet when suddenly one of the plane's engines blows apart.  In moments, every indicator on the instrument panel turns red, the cockpit fills with smoke and the plane plunges 30,000 feet in seconds.  With the ground looming, the pilot manages to transfer enough power to the remaining engine to stabilize flight and regain altitude.  Lights on the instrument panel turn from red to yellow, but making the airport is not yet guaranteed.
We review several hundred economic indicators each month and read about 600 pages per week of economic forecasts, trade magazines and opinions of other portfolio managers.  From October 2008 through March 2009, all those resources showed the equivalent of "red" across the board.  Now we're seeing a lot more "yellow." 

Read the entire commentary here.