It used to be a common belief of many managers that if you bought and held a portfolio of shares over any market cycle you would earn a decent return. This argument may be changing.
The argument went that the sharp cycles in shares were based on shallower and shorter cycles for economies. They might give you a bad time for a year or two if you bought at the top of a market cycle and immediately fell into a bear market, but the next cycle would see the index comfortably exceed the old highs. Recessions might last for a few quarters, with GDP dropping a few percent, to be followed by a recovery to new highs. Today this assumption about equity markets has taken something of a beating.
It remains true in the US that if you had bought badly you would now be in the money. Nasdaq has soared to spectacular new highs and the S&P 500 also reached a new peak despite the deep damage done by the lockdowns to the US economy. We have just witnessed an unprecedented fall in GDP – and may have to watch several quarters go by before we claw back to where incomes and output were – yet the stock market has already surpassed itself. It is looking to a more prosperous future despite the scarring from lockdowns and social distancing. It is also true that in Brazil and Australia shareholders were offered new highs in February this year before the onset of the virus.
For the last thirty years there was one hard case that did not follow the adage that shares make you money in the longer run – even if you bought at a peak in the market. Japan has never got anywhere near the old high of 38,957, hit by the Nikkei Index in December 1989. Powered upwards by plenty of money and huge confidence, Japanese financial and property assets reached giddy levels which have never been seen again. The authorities burst the bubble, sustained in the 1980s by excessive lending and unrealistic views of asset values. This ushered in a long era of low or no inflation and a share market which traded around half its previous high.
View Full Article – published by Charles Stanley on 24th August 2020
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