Welcome back to 2023 and this year signifies 34 years in the business of offering financial advice. One advantage of having such a long period of time observing markets and people is that you do pick up cyclical patterns. They are not always exactly the same, but there are discernible patterns, nevertheless. The start of this year is interesting as it marks only the 12th time in 95 years where the world’s biggest market index; the Standard and Poor’s Index of the top 500 stocks in the USA (the S&P 500) has gone negative. And to boot, it was a double-digit negative – 13.8%. So what can we deduce?
The chart below is the history of S&P returns from 1928 to 2022. Drawing on the last 50 years is the period that I would describe the USA as a “modern economy” based on the fact that computerisation in the 1970s was coming into play and that has rapidly changed the US economy in the last 50 years. The result is the the US economy is significantly different in the last 50 years compared to the previous 50 years before that.
In the last 50 years we have only had two periods of negative returns that went for longer than one year. We can also see that we have had extended periods of good returns (bull runs) over a number of years 1975 – 1999 and the period 2003 to 2021 was an extended bull period. Also, invariably after every negative year comes a very positive year. You will say to me that this didn’t occur from 2000- 2002 and you would be right, however the Global Financial Crisis had its own issues steeped in a credit crisis. Generally though, after a negative period there is a positive period and the greater the negative, then generally the greater the positive returns in the subsequent year/s. There can be no guarantees, but this has been a theme I have witnessed over many years. Also, I cannot but note that demand for goods and services in the world economy does not seem to be abating and furthermore, the Western industrialised economies simply do not have the people to do the work required.
For these reasons I remain very positive about the future for equities over the next two to three year period.