Despite what the perma-bull investment community continue to state, markets move up and down and can remain flat over multiple years, notes Landon Whaley.
I’ve written repeatedly about the fact the entire Old Institution infrastructure is built upon a foundation of constantly spewing a bullish equities narrative. There is an obsession, especially in the United States, with stocks and a mantra, perpetuated by people like Bill Sweet of Ritholtz Wealth Management, that "It's always a good time to invest.”
What the Old Institution doesn’t want you to know, and what Bill Sweet doesn’t realize because he’s been investing for three minutes, is that stock markets can go unchanged for long stretches of time.
In 1980, just as the Japanese bull market was getting started, you could have paid 6,995 for the Nikkei 225 equity index. In December 1989, someone paid 38,957 for the Nikkei 225, which remains its all-time high still this day. A few weeks after Lehman’s collapse in 2008, the Nikkei fell to 6,995 (revisiting the price paid in 1980), which marks a 38-year low. Today, the Nikkei trades at 23,204, unchanged from where it traded 33 years ago in June 1987.
In 1996, just as the Euro Stoxx equity index bull market was starting, you could have paid 1,765 for it. Four years later, in 2000, someone paid 5,464 for the Euro Stoxx, which remains its all-time high. In March 2009, the Euro Stoxx index returned to 1,765, the price paid in 1996, which also happens to be the 22-year low. Today, the Euro Stoxx index trades for 3,424, unchanged from where it traded 14 years ago in March 2006.
In 1999, the Shanghai Composite equity index was also at the beginning of a major bull market, and you could have paid 1,665 for it. Two short years later, a high of 2,245 was paid in anticipation of China’s admission into the World Trade Organization (WTO). Over the next four years, the Shanghai Composite fell to a low of 1,000 in 2005, before rocketing 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 trading in 1999. Today, the Shanghai Comp sells for 3,066, unchanged from where it traded 13 years ago in 2007.
I know what you’re thinking, this unchanged stock market is a phenomenon that only occurs outside the United States. Think again because 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 price in October 2007. After posting a brand new all-time high of 1,576, the S&P spent the next six-and-a-half years underwater before breaking through to a new all-time high in June 2013. The bottom line is that 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 500 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 and October 2007-January 2011. To clarify this last statement, 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.
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.
Fast forward to today, and 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.
In terms of valuation, there are only two years that mirror where the S&P stands right now, 1929 and 1998. Not only did the S&P experience nasty crashes in the 24 months following these peak valuations, but investors paid the price for the next two decades! In the 20-years following 1929, the S&P 500 delivered a paltry +2.4% annual return, and in the two decades after 1998, it gained just +7.1% annually. If these two periods are any guide, the only guarantee going forward is that double-digit returns in U.S. equities are in the rearview mirror.
Unfortunately for the Old Institution and the vast majority of investors not adept at trading a sideways market, the next decade will prove to be wrought with much more career and portfolio risk than the decade we just closed.
I have no idea if the S&P 500 will continue to run higher, but it wouldn’t surprise me in the least if I’m in January 2030 I’m discussing how the S&P 500 is just now rallying back to its Jan. 14, 2020 high of $3,293.62, unchanged after 10 years.
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