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Taking Stock - The X Axis

Date: 25 October 2022

When you look back at global stock market performance over the past ten years or so, it may feel like equity investors enjoyed a pretty easy ride. But the last decade has not all been plain sailing by any stretch and there have been several fairly brutal sell offs to negotiate along the way.

Most of these have been of the short, sharp variety, however. Almost everyone who is invested in the market today has some “muscle memory” from 2020, where if you were prepared to sit through the storm it was over pretty much as soon as it began (although it did not necessarily feel like that at the time…).

This year feels different. It is now 294 days (or four Chancellors) since markets peaked on 4th January. This is the longest continuous fall for the global stock market since the Financial Crisis.

Drawdown Start and End Date % Price Decline Length in Days
17/01/73 - 02/10/74 -44.5% 623
20/11/80 - 12/08/82 -28.2% 630
27/08/87 - 26/10/87 -23.7% 60
20/07/98 - 5/10/98 -20.5% 77
27/03/00 - 21/09/01 -40.9% 543
19/03/02 - 09/10/02 -31.3% 204
12/10/07 - 06/03/09 -58.4% 511
02/05/11 - 04/10/11 -22.6% 155
19/02/20 - 23/03/20 -33.9% 33
Average -33.8% 315

Market performance is MSCI World in USD terms. The bear market of 1968-1970 has been omitted as data is unavailable for the MSCI World index prior to 1970.
Source: MSCI

The current environment provides a different challenge than the modern investor has become accustomed to, one that requires a bit more endurance. I think that most of us are in a pretty good position to cope with large drawdowns (the y-axis). Of more concern is the length of time that this process can take to play out (the x-axis). Including the 73-74 fall, it has taken the stock market 315 days, on average, to reach a bottom during a bear market, and so at 294 days we are not far off. The process can, of course, go on for longer.

There is a theory, which I subscribe to, that due to the widespread adoption of computerised trading, rapid proliferation of information and more interventionist central banks market moves today naturally come and go more quickly than 50 years ago. The evidence of the past decade supports this conclusion. As well as 2011 and 2020, you can throw 2018 (which missed out on being an official “bear market” by a whisker) into the mix as a stock market sell off which was largely over before it started.

Some would say that such an environment has created a generation of investors who are too quick to “buy the dip”. I say that this is not necessarily a bad thing. Individual circumstances vary, but, more often than not, that is exactly the right thing to do - even if you are a little early. I would even go as far as to say that a small dose of naivety can be helpful at times - better to be proactively putting cash to work than constantly waiting for the next monster to emerge from under the bed. At some stage they stop appearing.

That’s the good news. Here is the bad news – no one will be able to tell you when the “coast is clear”. There is no magic signal which indicates a market bottom. However, history tells us that when markets bottom, they tend to bounce hard. In addition to the figures in the above table, I have added the returns for the day after the market bottomed, as well as returns over the following one and six months.

Drawdown Date % Price Decline Length (days) Performance on day post market bottom 1 month return post bottom 6 month return post bottom
17/01/73 - 02/10/74 -44.5% 623 2.2% 8.7% 29.8%
20/11/80 - 12/08/82 -28.2% 630 1.2% 13.4% 43.6%
27/08/87 - 26/10/87 -23.7% 60 1.9% 6.7% 21.4%
20/07/98 - 5/10/98 -20.5% 77 1.4% 18.0% 32.6%
27/03/00 - 21/09/01 -40.9% 543 3.8% 10.8% 17.9%
19/03/02 - 09/10/02 -31.3% 204 2.5% 13.7% 9.7%
12/10/07 - 06/03/09 -58.4% 511 5.3% 21.7% 54.2%
02/05/11 - 04/10/11 -22.6% 155 2.0% 12.0% 20.2%
19/02/20 - 23/03/20 -33.9% 33 8.8% 23.2% 43.9%
Average -33.8% 315 3.2% 14.2% 30.4%

Market performance is MSCI World in USD terms. The bear market of 1968-1970 has been omitted as data is unavailable for the MSCI World index prior to 1970.
Source: MSCI

When markets go down a lot, volatility (the amount that the market moves around day to day) tends to spike. This means that when we do eventually reach the bottom, the elastic band tends to snap back quite hard and returns in the early stages of recovery have been high. You have to still be in the game by that stage to benefit of course…It is cruel irony that the best short-term returns for the market tend to occur during periods of maximum pain, but no one said this investing malarky was easy.

As I wrote back in August, I continue to believe that the path for inflation is the number one question for the markets right now. If (when?) inflation shows signs of abating, that could be the cue for markets to stage a recovery. Maybe central banks will ease up on the hawkish rhetoric. Or company earnings this time around will prove to be better than expected. Who knows what the catalyst will be, or if we even need one?

The point is, we won’t necessarily need good news for markets to turn – just better than expected. And what seems to be expected at the minute is pretty dire.

All the best.

The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information 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. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)

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