Stocks Don't Only Go Up!

Despite what you might have heard, equities can move up or down, and sometimes sideways for long (often decades) periods of time, writes Landon Whaley.

I’ve written repeatedly about the fact the Old Institution infrastructure is built upon a foundation of always being bullish equities. There is an obsession with stocks and a constant narrative — which is especially present in U.S. investing circles — that it's always a good time to invest.

What the Old Institution doesn’t want you to know, and what many business media taking heads don’t seem to realize, is that stock markets can go unchanged for long stretches of time.

In 1980, just as the Japanese bull market was getting started, the Nikkei 225 equity index traded at 6,995. In December 1989, the Nikkei 225 was at 38,957, which remains its all-time high. A few weeks after Lehman’s collapse in 2008, the Nikkei fell to 6,995 (revisiting the price you paid in 1980), which marks a 38-year low. Today, the Nikkei trades at 22,079, unchanged from where it traded 29 years ago in 1990.

In 1996, just as the Euro Stoxx equity index bull market was starting, it traded at 1,765. Four years later, in 2000, it traded at 5,464, which remains its all-time high. In March 2009, the Euro Stoxx index returned to 1,765, the level it was at in1996, which also happens to be the 22-year low. Today, the Euro Stoxx index trades for 3,238, unchanged from where it traded 21 years ago in 1998.

In 1999, the Shanghai Composite equity index was also at the beginning of a major bull market, trading at 1,665. Two short years later, it reached a high of 2,245 in anticipation of China’s admission into the World Trade Organization. Over the next four years, the Shanghai Composite fell to a bottom of 1000 in 2005, then rocketed to an all-time high of 6,124 in 2007. Less than 12 months later in 2008, the Composite fell back to 1,665, where it was in 1999. Today, the Shanghai Comp trades for 3,006, unchanged from where it traded 12 years ago in 2007.

If you think this just affects non-U.S. stock markets, think again. Global equity markets aren’t the only stocks to experience multi-year periods with nothing to show for it.

The S&P 500 peaked at 1,552 in March 2000, only to spend the next seven-and-a-half years underwater before getting back to that level in October 2007. After posting a brand new all-time high of 1,576, the S&P 500 spent the next six-and-a-half years underwater before breaking through to a new all-time high in June 2013. +

After peaking in early 2000, the S&P went unchanged until June 2013. Though it gave investors a wild ride for those 13 years, the S&P went nowhere cumulatively, in price change terms.

Since 1964, there have been four occurrences where U.S. equity returns have been negative for a period of at least 10 years: July 1964-December 1975, August 1967-May 1979, June 1972-July 1982, October 2007-January 2011. If you evaluate the trailing 10-year returns at the end of each month, the S&P 500’s 10-year returns were negative every month from July 1964 until December 1975, and for the other three periods as well.

Keep in mind; this analysis tosses out the post-Depression period from December 1937 to August 1950 when equities were underwater and clawing their way back to breakeven.

Currently, I can’t even begin to express just how unprecedentedly bullish U.S. equity market conditions have been for the last decade, and I’ll bet dollars to donuts the next 10 years look very different.

Unfortunately for the Old Institution and the vast majority of investors not schooled in trading a sideways market, the next decade will prove to be wrought with much more career and portfolio risk than the decade we’ll finish in three months.

I have no idea if the S&P 500 will make another significant run higher, but it wouldn’t surprise me if I’m writing in 2029 about how the S&P has finally rallied back to its July 2019 high of 3,027.98, unchanged after 10 years.

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