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Time to seize the moment for 2018

Thursday, January 18, 2018

People are by nature risk averse so while many will look towards 2018 with overall optimism when it comes to money, finances and the performance of the respective financial markets we are always tempted to find any number of things to worry about.

That being said there are no shortage of issues to occupy our minds. One only has to look at the daily headlines. At a global level it could be North Korea, it could be the Middle East, it could be a continued trend of climate related challenges or it could just be the unpredictability of key global leaders. All of these are enough to cause us worry.

However through all of our worries and concerns it is important to appreciate that markets spend more time in an up cycle than in a down cycle. The problem is that moves to the downside occur more rapidly than moves to the upside. This is where the fear factor comes in.

Using the US stock market to illustrate the point in any one year the stock market will go down roughly 47 per cent of all trading days. However those are the days which will capture the headlines and so those are the days that investors will remember.

Over time it seems like more than it really is and investors shy away thinking investing in stocks is too risky.

On an annual basis going back 90 years the benchmark US stock market index the S&P 500 has had gains in 66 years and losses in 24 years.

However once again the loss years stand out because of the drama that usually surrounds. We remember the financial crisis of 2007 and 2008, we remember the dot com crash of 1999 and 2000, we remember Black Monday of October 1987. We tend to forget everything in-between but the real opportunity lies in those years in-between.

A 66- to 24-year ratio means that the stock market has gained in three years for every one down year. The annualised return over that period is 9.6 per cent and the market has gained over 20 per cent in 30 out of those 90 years. Double-digit returns (returns of over 10 per cent) have been experienced in 51 out of the last 90 years.

The year 2017 was one example of those double digit years but if you go back to the narrative at the start of last year it was one which had similar levels of caution and angst as we have at the start of this year.

Last year the S&P 500 was up over 21 per cent and every sector showed a positive return except for energy and telecoms. The take away from that and from the previous five years and ten years where the S&P 500 has been up annually over 15 and eight per cent respectively is that the market is on a very long bull run and it is quite possible that it is nearing the end of that run.

That is not to say that there will not be a continuation of positive returns in 2018. To try to guess the return in any one year is nothing more than throwing darts. What the past 5 and 10 years does say is that expected returns going forward would likely be lower than the returns just experienced however from all of the above statistics you should appreciate that it is better to be in the market than out of it.

Ian Narine


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