This is from my recent post on talkmarkets.com:
Looking at the weekly close on the S&P 500 since 1950 its average close stands at 522 while the standard deviation stands at 606. One of the few markets in the world where the standard deviation exceeds the mean. This is also true with other US indices like the Dow and the NASDAQ but is not the case with emerging markets. This has been the case with US markets since 1998 when the FED intervened in the market to bail out the failing LTCM. Subsequent Fed intervention has caused the risk in the market to go up and not come down.
Taking this a step further looking at where we are now we are sitting at well over 3 standard deviations over the mean. Earlier situations like this produced corrections in excess of 15%. Let's take a look at some of them:
S&P 500 returns from its peak at about 3 Standard Deviations above the Mean
Time Standard Deviations above Mean %Loss from Top
- August 1987 4.57 33%
- July 1998 4.93 18%
- March 2000 4.63 26%
- May 2001 3.20 25%
- October 2007 2.84 56%
- July 2015 3.04 16%
This is not to say the markets will start crashing tomorrow but given the insane valuations and the fact that we have not visited the long term average on the S and P 500 which stands at 522 since 1974, the risks are out there!