The Anatomy of Bull and Bear Markets Tom Vernon/James Hutton
Recent market correction in context of long-term returns S&P 500 2900 DURATION: 9 DAYS 2850 2800 2750 2700 2650 MAGNITUDE: -10.2% 2600 2550 2500 2450 2400 17/11/17 01/12/17 15/12/17 29/12/17 12/01/18 26/01/18 09/02/18 Source: Sarasin & Partners, Shiller
Recent market correction in context of long-term returns S&P 500 10000 1000 100 10 1 1918 1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 Source: Sarasin & Partners, Shiller
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 40 30 20 10 0-10 -20-30 -40 26 15 17-7 -10-17 -18-17 1-13 26 15-8 -9 2-34 12 27-8 -8-7 -20 26 7 4-6 -6-5 -2-9 34-3 20-8 31 27 26 20-10 -11-12 -13-14 -17-19 -23-30 -34 23 14 13 13 9 3 4 0-8 -7-8 -10-10 -16-19 -28-38 30 11-6 -7-1 10-12 -11 19-3 4-10 -50-49 -60 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 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)
Durations and magnitudes of previous bull markets BULL MARKETS SINCE 1928 500% 450% Dec 87 Mar 00 400% 350% 300% Jun 49 Jul 57 Mar 09 to date 250% 200% 150% 100% 50% Oct 74 Dec 80 0% 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 125 130 135 140 145 Months Source: Yardeni Research Inc Average bull market duration: 3.3 years Average bull market gain: 118%
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% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Months Average bear market duration: 1.6 years Average bear market loss: -37% Source: Yardeni Research Inc
Price Return Bull markets tend to be longer and larger than bear markets DURATIONS AND MAGNITUDES OF BULL AND BEAR MARKETS SINCE 1928 500% 400% 300% 200% 100% 0% -100% 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 Months Source: Yardeni Research Inc
5 significant bear markets interrupting the long-term trend S&P 500 10000 1000 100 10 1 1918 1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 Source: Shiller
History
1929 1932 The Great Depression S&P 500 1924-1954 40 35 DURATION: 2.8 YEARS TIME TO RECOVER: 25 YEARS 30 25 20 15 MAGNITUDE: -83% 10 5 0 1924 1926 1929 1931 1934 1936 1939 1941 1944 1946 1949 1951 1954 Bear market factors: Recession, excessive valuations, buying on margin, banking crisis, policy error Source: Shiller
1970s S&P 500 1967-1980 140 130 120 1.6 YEARS 2 YEARS 1.8 YEARS 8 YEARS 110 100 90 80 70-29% -43% 60 1967 1969 1971 1973 1975 1977 1979 Source: Shiller Bear market factors: Geopolitics, recession, inflation
1987 Black Monday S&P 500 1983-1990 400 0.25 YEARS 2 YEARS 350 300 MAGNITUDE: -30% 250 200 150 100 1983 1984 1985 1986 1987 1988 1989 Source: Shiller Bear market factors: Softer economic growth, geopolitics, high valuations, computer trading
2000 Dot-Com Bubble NASDAQ 1990-2015 6000 5000 2.1 YEARS 14 YEARS 4000 3000-75% 2000 1000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: Sarasin, Bloomberg Bear market factors: Speculative asset bubble, excessive valuations, terrorism
2007 Global Financial Crisis FTSE ALL SHARE 2003-2013 1.3 YEARS 4 YEARS 3500 3000-51% 2500 2000 1500 1000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Sarasin, Bloomberg Bear market factors: Excessive leverage, housing crash, banking crisis, recession
1929 1932 Great Depression S&P 500 60 50 40 30 20 10 0 1921 1923 1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 1949 1951 1953 1955 Source: Shiller
1970s Oil crisis S&P 500 140 130 120 110 100 90 80 70 60 50 40 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Source: Shiller
1987 Black Monday S&P 500 400 350 300 250 200 150 100 1984 1985 1986 1987 1988 1989 1990 Source: Shiller
2000 Dot-Com Bubble S&P 500 1600 1400 1200 1000 800 600 400 200 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Shiller
2007 Global Financial Crisis S&P 500 3,000 2,500 2,000 1,500 1,000 500 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Shiller
Lessons from the past Conditions for bear markets and how do these compare to today?
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
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
Market timing strategy and tactics
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 8,426 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Source: Sarasin & Partners, Bloomberg
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 80,000 100,000 120,000 140,000 Source: Sarasin & Partners, Bloomberg
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% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Sarasin & Partners, Bloomberg
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 80,000 100,000 120,000 140,000 Source: Sarasin & Partners, Bloomberg
What should you do to protect against market declines?
Review your investment strategy Long term assets only in volatile asset classes Ensure sufficient cash buffer for 12 24 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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