Regression to Trend: S&P Composite 117% Above Trend in May

Quick take: At the end of May, the inflation-adjusted S&P 500 index price was 117% above its long-term trend, unchanged from April.

About the only certainty in the stock market is that, over the long haul, overperformance turns into underperformance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis (see footnote below) to the question.

Below is a chart of the S&P composite stretching back to 1871 based on the real (inflation-adjusted) monthly average of daily closes. We're using a semi-log scale to equalize vertical distances for the same percentage change regardless of the index price range. The regression trendline drawn through the data clarifies the secular pattern of variance from the trend — those multi-year periods when the market trades above and below trend. That regression slope, incidentally, represents an annualized growth rate of 1.93%.

S&P Composite Regression to Trend

At the time, the peak in 2000 marked an unprecedented 115% overshooting of the trend — substantially above the overshoot in 1929 (78%) and in 1901 (92%). In recent years, we have seen the index get as high as 178% above the trend (2021). The index has been above trend for nearly three decades, with one exception: from October 2008 to August 2009 the index dropped as low as 26% below trend.