Lack of conviction….
A politician needs the ability to foretell what is going to happen tomorrow, next week, next month, and next year. And to have the ability afterwards to explain why it didn’t happen.” – Winston Churchill
Most capital market forecasts for the year ahead tend to be narrow consensus extrapolations of broad trends and historic data, in which analysts look in particular at the last 12 months, especially in a rising market, and assume, as a baseline, that a similar outcome will recur in the next 12 months – more bullish analysts forecasting returns above the baselines, more negative ones assuming below baseline, but overall within a very limited distribution range.
Following negative years, analysts generally seem to concur that as major indices, such as the S&P 500, have exhibited positive returns on average for 3 out of every 4 years over the last century, the negative return year is just a quadrennial event, like the Olympic Games or FIFA World Cup.
There’s battle lines being drawn, Nobody’s right if everybody’s wrong – The Buffalo Springfield
Overall, this approach has some degree of reliability – firstly, there’s the element to which capital market forecasts influence investor behaviour and therefore a powerful consensus can become a self-fulfilling prophecy.
What’s more, the construct of discrete calendar years only has psychological and not fundamental relevance to capital markets – therefore what happened in 2022 is an ongoing process that has no reason to come to a complete end on December 31st and just give way to a whole new trend, starting on January 1st., simply because it is a new year. In other words, 2023 is an extension of 2022, just as each succeeding year is a continuation of the previous year. The S&P 500, by way of example, fell by almost -20% in 2022, losing around -6% in December to close the year on a negative note. As 2022 ended on a down note in equity markets, the prevailing trend would, prima facie, be expected to be strongly negative. However-
The truth is rarely pure and never simple. Modern life would be very tedious if it were either, and modern literature a complete impossibility!”
– Algernon, The Importance of Being Earnest – Oscar Wilde
Arguments in favour of an immediate break to the downward trend are that January tends to be a month that yields above average positive returns, but also that since the end of World War II, the 20 years of negative returns on the S&P 500, have only resulted in 2 negative sequences – 1973-74 and 2000-2002.(1) Before we draw too much comfort from that, it does mean that 5 of the 20 negative years (25%) occurred within multiyear sequences. The last 4 negative years, (2018, 2015, 2011 and 2008) prior to 2022, were single year falls. While distribution of the negative years follows no particular pattern, the statistical probability of 2022 being the first year in a multiyear fall shouldn’t be dismissed. Of further concern, it’s worth noting that 1974 was a sharper fall than 1973 while 2001 was worse than 2000 and 2002 was worse than 2001.
In the same timescale, there have been 16 years in which the US 10-year treasury bond has yielded negative total returns, with 2 multiyear instances (1958-59 and 2021-22), in both cases the second year being worse for investors, in 2022 significantly so. 2022 was the worst calendar year in history for treasuries and 2021-22, the worst 2-year period. (2)
In short, precedent provides no reliable guide about the direction of capital markets for the year ahead, indicates that negative successive calendar years are relatively unlikely but far from unknown and that the risk of 2023 being a worse year for equity indices than 2022 shouldn’t be considered as insignificant, whereas the idea of a third down year in treasury markets, although it can’t be ruled out, should be considered a paradigm shift without precedent.
Our sense is that while portfolio returns have been positive during the last 6 months or so (although for typical USD portfolios, only by 1-2%, whereas for other currencies, typically by medium to high single digits), volatility for USD portfolios has been off any scale that we’d regard as recognisable outside of a crisis (3) –
“It is not given to human beings, happily for them, for otherwise life would be intolerable, to foresee or to predict to any large extent the unfolding course of events.”
– Winston Churchill
Gong xi fa cai….🧧
Wishing you a happy, healthy and prosperous Chinese New Year, whatever the markets may inflict upon us.
MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.
For more information and to speak with our advisor, please contact us at
☎ call on +66 2 665 2534
About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
