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More up than down

14 September 2018

Inexperienced investors can start to feel uneasy as bull markets mature – a glance at history should help calm the nerves.

According to Woody Allen, 80% of success is just showing up.

Investors have felt the force of that argument over the past nine-and-a-half years, as stockmarkets have clocked what, by some definitions, is the longest bull run in history.

It may have been dubbed ‘the most hated bull market ever’ by investors, built as it has been on a hesitant economic recovery and emergency measures by the world’s central banks, but that hasn’t prevented those investors from enjoying the rewards.

Yet the longer the run continues, the more some investors worry that it must be about to end.

As ever, of course, opinion varies on just how mature the current bull run really is, and just how close a correction could be.

For a start, not all stock indices are equal, highlighting once again the benefits of diversification. Emerging markets have suffered a bad year in 2018, and several countries’ indices have already dipped in and out of bear markets – defined as a fall of 20% or more below the previous peak.1 Earlier this month, the broader MSCI Emerging Markets Index fell into technical bear market territory.

At the other end of the spectrum, the US market has continued its surge, and is up around 8% for the year already, having clocked a series of record highs. Yet some see it as vulnerable – and the lull in volatility seen in recent years is certainly abnormal in historical terms. The VIX, which measures volatility on the S&P 500, has a long-term average of 20, but in 2018 it has averaged below 13.2 Markets may have largely shrugged off the various global economic and political uncertainties at large for the moment, but a spike in volatility in the near future would hardly come as a surprise.

Some commentators have forecast a 10–20% correction in the coming months.3 Others have argued that bear markets tend to coincide with recessions, and US data hardly suggests a recession; with unemployment at decade-lows, corporate earnings on a tear, and GDP growth at around 4%.4

The only way (long term) is up

We believe long-term investors should take a different view; namely, that it doesn’t matter. Look at the history, and it is quickly apparent that market corrections have always been ironed out, often quite quickly. In fact, if you consider how the S&P 500 has performed over the past century, the average bear market didn’t even last two years, making them little more than short-lived sub-plots (while the typical bull run has lasted more than five years).

The main story was that, between 1918 and 2018, the S&P delivered a total return of almost 37,000% – an illustration (albeit an extreme one) of the benefits of the long-term view.5 That translates into an average annual rise, with dividends reinvested, of around 10%. No wonder Warren Buffett, the world’s most celebrated investor, said last year that he expects the S&P 500 to hit a million points in 100 years' time.

Source: Bloomberg

Yet the fact that bear markets do happen presents opportunities to investors who can keep their heads. By not following the herd to the exit, they will be around to enjoy the recovery that follows. Moreover, when volatility hits and markets suffer a fall, they are given the chance to buy quality companies at attractive prices. Painful as volatility can feel, it’s at just such times that active managers can help long-term investors build wealth.

Forecasting the precise timing of that recovery is all but impossible, but investors don’t need to.

They just need to remember that, over the long term, stocks have an enviable track record.

 

Past performance is not indicative of future performance and the value of your investment, as well as any income, can go down as well as up. You may get back less than you invested.

© S&P Dow Jones LLC 2018; all rights reserved

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

1 Source: Bloomberg, accessed 14 September 2018
2 Source: Bloomberg, accessed 14 September 2018
3 https://www.cnbc.com/video/2018/08/31/chart-implies-10-to-20-percent-correction-coming.html
4 Sources: US Bureau of Labor Statistics, Trading Economics, US Bureau of Economic Analysis, accessed 14 September 2018
5 Source: Bloomberg, accessed 14 September 2018

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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