05/05/2009 - Updated 5:34 PM ET
Investors face long road ahead to break even
Investors need S&P 500 to rally another 72.5% in order to recoup losses
By Nick Godt, MarketWatch
NEW YORK (MarketWatch) -- Even as the market flirts with the break-even level for 2009, investors dreaming of recouping their money invested in stocks before the crisis still face a long road ahead.
Investors who were fully invested in the broad S&P 500 index at its 2007 heights still need that index to rally another 72.5% just to recoup their losses, according to Standard & Poor's. Including dividends firms give back to investors, the S&P still needs to rally 70%, as most S&P companies have cut back the income they provide investors.
"If people are concerned about the market going up over the last 90 days, then they can look at this to put things in perspective," said Howard Silverblatt, index analyst at S&P, referring to recent investor caution that the market might have rallied too far, too fast since March.
On Tuesday, the S&P 500 [$SPX] , the index most widely used by investment professionals to benchmark the market, fell 3 points, or 0.4%, to 903. On Monday, the broad index closed in positive territory for 2009, and after Tuesday's losses it remained up 0.1% for the year so far.
The Dow Jones Industrial Average [$INDU] lost 16 points, or 0.2%, to close at 8,410 on Tuesday. It remains down 4.2% for the year. The Nasdaq Composite [COMP] was down 9 points, or 0.5%, at 1,754. The technology-heavy index is up 11.2% for 2009.
Since hitting 12-year lows in early March, the market, as measured by the S&P 500 index, has now rallied about 35%. The move has been largely fueled by optimism that the free-fall of the financial system and the economy has stopped.
But the advance remains only a small step if one intends to see their S&P 500 portfolio return to pre-crisis levels. From its October 2007 highs to its lows in early March of this year, the S&P plunged 57%.
Yet, returning to the October 2007 levels means the S&P needs to gain much more percentage wise.
"That happens for a mathematical reason: When you're working from a lower base you have to work double," says Paul Mendelsohn, chief investment strategist at Windham Financial Services.
"But a lot of investors close to retirement are already feeling those statistics, as they have to wait a lot longer to retire just to get back to breakeven," he said.
Back in eight years
Going back to 1926 through October 2007, the average yearly return of the S&P 500 has been 10.5%. But if one includes the past 17 months of slump, the average yearly return has now sunk to 9.6%.
For the S&P to again deliver its 10.5% average yearly return, the index would need to rally 115%, or rally more than 1,000 points to reach 1,950. Based on the average yearly gain of the S&P, it would take eight years for this to happen, according to S&P.
"But in the 1930s, we had some years that returned 85% because we had fallen so hard," said S&P's Silverblatt. "This time, it could also happen but it's safe to say that it will take at least several years."
The bright side
"While those that listened to their advisers who told them to stay invested past retirement will find it hard [to make up their losses], if you didn't get in at the top, you're down from your peak but not down as much from your average gains," said Windham's Mendelsohn.
And the severity of the market's collapse of the past few years could again warrant a big move in stocks this year, granted that the economy and the financial system remain on a recovery path, some analysts believe.
The market's return to break even might also encourage more investment managers to get back into market, in order to not be left behind.
"We suspect professional money managers with too much cash who are lagging the market indices will feel even more pressure to put money to work," said Frederick Dickson, chief market strategist at D.A. Davidson & Co.
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