One of Crestmont’s most recognized presentations is the Stock Market Matrix, the multicolored mosaic of investment returns over the past century. The Stock Market Matrix was one of Crestmont’s first research initiatives. In the summer of 2001, the objective was to determine whether the stock market had completed its retreat from recent highs and would soon return to new territory, or whether the pullback was far from complete. In a discussion with an experienced investor, debate raged about long-term returns in the stock market and whether the trend had made its way back to the level that would allow average returns in the future. The crux of the discussion focused on the returns that are typically presented–the long-term return series of seventy-five years or more that is often used by investors and investment advisors.
Some of the most popular presentations of long-term stock market returns arbitrarily start in the 1920s and determine the returns through the present. The first question was whether that starting date is reasonable or whether it distorts the analysis. If the starting level in the stock market is the high in 1929, the returns are quite different than if the starting level is the low that occurred after the crash in 1929. An analysis of returns that is dependent on a single starting point may produce invalid information.
After many long hours, a detailed presentation was developed. Rather than start at one date in the distant past, multiple starting points at the beginning of every decade were chosen. The result was eleven sets of analyses laid out for consideration. Almost conclusively, they reflected that the market remained overvalued to various degrees. The astute investor, however, identified another vulnerability when he asked, “But isn’t the analysis still subject to single-point risk? What if the start of every decade distorts the results for some reason?”
In response to the challenge, the Crestmont Stock Market Matrix was developed as a method to present every annual return scenario since 1900. The Crestmont Matrix provides every starting year and every ending year, and then calculates the annualized return for the periods. In addition, the Crestmont Matrix uses modes of coloration and ancillary information to enhance its effectiveness as a communication tool. Returns are denoted in shades of red, blue, and green to reflect the level of returns. Further, information about economic growth, inflation, and historical events over the past century are included to add depth to the chart’s messages. Today, around the world, hundreds of thousands of copies of the Stock Market Matrix have been downloaded from CrestmontResearch.com.