The Anatomy of Bull and Bear Markets. Tom Vernon/James Hutton

Transcription

1 The Anatomy of Bull and Bear Markets Tom Vernon/James Hutton

2 Recent market correction in context of long-term returns S&P DURATION: 9 DAYS MAGNITUDE: -10.2% /11/17 01/12/17 15/12/17 29/12/17 12/01/18 26/01/18 09/02/18 Source: Sarasin & Partners, Shiller

3 Recent market correction in context of long-term returns S&P Source: Sarasin & Partners, Shiller

4 Corrections are normal and typically occur every year, but don t necessarily result in full year declines S&P 500 INTRA-YEAR DECLINES VS CALENDAR YEAR RETURNS Calendar Yr Return Intra-year drop Source: FactSet, Standard & Poors, Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. Returns shown are in calendar year returns from 1980 to 2018 (2018 to end February 2018)

5 Durations and magnitudes of previous bull markets BULL MARKETS SINCE % 450% Dec 87 Mar % 350% 300% Jun 49 Jul 57 Mar 09 to date 250% 200% 150% 100% 50% Oct 74 Dec 80 0% Months Source: Yardeni Research Inc Average bull market duration: 3.3 years Average bull market gain: 118%

6 Durations and magnitudes of previous bear markets BEAR MARKETS 0% -10% -20% Mar 00 Oct 02-30% -40% -50% Sep 29 Jan 73 Oct 74-60% -70% Oct 07 Mar 09 Apr 30 Jun 32-80% -90% Months Average bear market duration: 1.6 years Average bear market loss: -37% Source: Yardeni Research Inc

7 Price Return Bull markets tend to be longer and larger than bear markets DURATIONS AND MAGNITUDES OF BULL AND BEAR MARKETS SINCE % 400% 300% 200% 100% 0% -100% Months Source: Yardeni Research Inc

8 5 significant bear markets interrupting the long-term trend S&P Source: Shiller

9 History

10 The Great Depression S&P DURATION: 2.8 YEARS TIME TO RECOVER: 25 YEARS MAGNITUDE: -83% Bear market factors: Recession, excessive valuations, buying on margin, banking crisis, policy error Source: Shiller

11 1970s S&P YEARS 2 YEARS 1.8 YEARS 8 YEARS % -43% Source: Shiller Bear market factors: Geopolitics, recession, inflation

12 1987 Black Monday S&P YEARS 2 YEARS MAGNITUDE: -30% Source: Shiller Bear market factors: Softer economic growth, geopolitics, high valuations, computer trading

13 2000 Dot-Com Bubble NASDAQ YEARS 14 YEARS % Source: Sarasin, Bloomberg Bear market factors: Speculative asset bubble, excessive valuations, terrorism

14 2007 Global Financial Crisis FTSE ALL SHARE YEARS 4 YEARS % Source: Sarasin, Bloomberg Bear market factors: Excessive leverage, housing crash, banking crisis, recession

15 Great Depression S&P Source: Shiller

16 1970s Oil crisis S&P Source: Shiller

17 1987 Black Monday S&P Source: Shiller

18 2000 Dot-Com Bubble S&P Source: Shiller

19 2007 Global Financial Crisis S&P 500 3,000 2,500 2,000 1,500 1, Source: Shiller

20 Lessons from the past Conditions for bear markets and how do these compare to today?

21 Common bear market factors and conditions today ECONOMIC GROWTH Weakening economic conditions or recession INFLATION / DEFLATION Threat of higher inflation or deflation GOVERNMENT & CENTRAL BANK POLICY Risk of policy error by governments or central banks VALUATIONS Excessive valuations, speculative bubbles, complacency GEOPOLITICS & TERRORISM Uncertain geopolitical backdrop UNKNOWN Unknown factors, incl. technological & financial innovation

22 UNKNOWN FACTORS Unknown factors What do we have in 2018 that we didn t have when previous bull markets ended? - Cyber terrorism - High speed computer trading algorithms - Artificial Intelligence - Social media / fake news - Driverless cars - Cryptocurrencies - Smartphones

23 Market timing strategy and tactics

24 Market timing What happens if you miss the equity markets best days? 10,000 INVESTED IN THE FTSE ALL SHARE (INCL. DIVIDENDS) ON 1 ST FEBRUARY 1998 Stay fully invested 31,350 Missed 10 best days 15,504 Missed 15 best days 12,447 Missed 25 best days 8, ,000 10,000 15,000 20,000 25,000 30,000 35,000 Source: Sarasin & Partners, Bloomberg

25 Market timing What happens if you miss the equity markets best and worst days? 10,000 INVESTED IN THE FTSE ALL SHARE (INCL. DIVIDENDS) ON 1 ST FEBRUARY 1998 Stay fully invested 31,550 Missed 25 best days 8,426 Missed 25 worst days 126,301-20,000 40,000 60,000 80, , , ,000 Source: Sarasin & Partners, Bloomberg

26 Standard Deviation of Returns Market timing Best and worst days tend to be clustered together FTSE ALL SHARE VOLATILITY WITH 25 BEST AND 25 WORST DAYS 5% 4% Best days Worst days 3% 2% 1% 0% Source: Sarasin & Partners, Bloomberg

27 Market timing What happens if you miss the equity markets best and worst days? 10,000 INVESTED IN THE FTSE ALL SHARE (INCL. DIVIDENDS) ON 1 ST FEBRUARY 1998 Stay fully invested 31,550 Missed 25 best days 8,426 Missed 25 worst days 126,301 Missed 25 best and 25 worst days 33,945-20,000 40,000 60,000 80, , , ,000 Source: Sarasin & Partners, Bloomberg

28 What should you do to protect against market declines?

29 Review your investment strategy Long term assets only in volatile asset classes Ensure sufficient cash buffer for month spending commitments Review investment time horizon Ensure proper diversification across and within asset classes Allow active tactical asset allocation Ensure sustainable income generation / cover Focus on companies with robust earnings and thematic tailwinds ESG governance issues lead to dividend cuts Make use of alternative asset classes & investment techniques

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