Howay the Ladds this month focuses on market returns. Reflecting on where we are today, and considering the longer term opportunities.

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August 2023

Since we established the portfolios in 2009, we have seen three down periods – 2011, 2018 and 2022. In 2011 and 2018 we saw a recovery the following year.

The chart below shows S&P 500 bear markets between 1958 and 2022.

The longest period of negative returns during this period started in early 2000 and lasted for 31 months.

What we often see at the end of these periods are prolonged positive returns.

The chart below shows the spread of returns of US assets, and what this demonstrates is that holding for the longer term is more likely to deliver positive outcomes.  

Despite all the evidence the most difficult time for investors is during the prolonged periods of negative returns. This chart shows net fund flows and how investors tend to sell out at the very bottom of the market.

We can argue that the S&P 500 has performed strongly recently. However, the chart below shows that it is only a part of the index that has done well.

We don’t benchmark our portfolios against a single index, nor do we invest in a single region. The charts below show two things. The first one is an estimation of future returns, and the second shows which world stock markets have performed the best.

To summarise:

  • We have been in a period of negative returns since January 2022. Although we haven’t seen a prolonged period of negative returns for many years, we can see that since 1958 there have been 5 periods where negative returns lasted for more than 12 months.
  • Since 1958, 9 periods have seen returns of more than 50% during the period of recovery. Despite this, some investors will capitulate at the very bottom of the market and therefore miss out on the full recovery.
  • The S&P has done well over the last 18 months but it is driven by a small part of the index.
  • Although the US has led the returns over the last ten years, this might not be the case over the next ten years.
  • Reflecting on short term performance can see a big difference between positive and negative returns. Longer term investors are more likely to see positive outcomes.
  • Diversification takes away the risk of trying to speculate on a particular region or asset class, and over the long-term should deliver more consistent returns.

Tracking the market

July was a positive month for markets, with crude oil Increasing significantly from the previous month but still around the same level as the start of the year. It is also lower than it was on 1 January 2013. Bitcoin continues to recover but is below the 2022 levels, but higher than January 2018.

1 January 20131 January 20181 January 20221 January 202331 July 2023Increase (2023)Increase since 2013Increase since 2018
Bitcoin USDN/A14,360.2047,686.8116,625.5129,230.11+75.81%N/A+103.55%
Crude oil97.4953.7976.0880.5781.80+1.53%-16.09%+52.07%
S&P 5001,498.112,823.814,796.563,853.294,588.96+19.09%+206.32%+62.51%
Stoxx index287.22395.46489.99430.01471.35+9.61%+64.11%+19.19%
FTSE 1006,276.906,968.907,505.207,451.707,699.40+3.32%+22.66%+10.48%
Hang Seng23,729.5332,887.2723,374.7519,570.4320,078.94+2.60%-15.38%-38.95%
Nikkei 22511,138.6620,773.4929,301.7925,834.9333,172.22+28.40%+197.81%+59.69%

Sources of data: CNBC, Yahoo Finance & Reuters

What is in and what is out?

There continues to be a shift in the top-10 strategies, with no clear winners. The top-3 are iShares MSCI Turkey UCITS +66.90%, HSBC MSCI Turkey +61.00%, and Schroder ISF Emerging Europe +47.80%.

At the bottom there is a mix of strategies. The bottom three are LF Equity Income -56.80%, HAN Medical Cannabis and Wellness UCITS ETF -50.50% and Aegon Property Income -34.60%.  

This year we had seen steady inflows, although June saw outflows from investment funds.

The main areas where we saw money come out were Healthcare -£323 million, North America -£618 million, UK All Companies -£573 million, Short Term Money Market -£311 million and Targeted Absolute Return -£358 million.

The main inflows went to Japan +£215 million, Specialist Bond +£238 million, and UK Gilts +£504 million.

The Fear and Greed Index has edged back. This is a gauge of what emotions are driving the US market now. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect.

What we can see is that the market has moved from “extreme greed” to “neutral”. The score is 46, so has come down from the high of 83.

Another way to look at this, is that when the S&P 500 is above its moving or rolling average of the prior 125 trading days, that’s a sign of positive momentum. We can see that this line is declining.  

In terms of a recession, it is worth sharing the latest insights from ClearBridge Investments. The chart below focuses on a rolling sector recession which has been muted.

All the leading indicators point to a recession.

Why we focus on a recession is that market lows tend to come during a recession. Once we enter this point we can then start to see a sustainable recovery in equity values.

It is worth ending with these charts. The first shows that missing the best days can drastically reduce returns, and the second focuses on timing the market.

In summary, the difference between the best and worst funds over 12-months continues to offer extremes but no consistency. Investors have started to take money out at a time when we seem to be edging closer to a recession, especially in the US.

Although a recession can be difficult for people, it tends to be good for markets. Historical evidence suggests that however difficult and uncomfortable it feels in the here and now, waiting for the rebound where possible might be the best thing to do.

Sources of data: TrustNet, Investment Association, Templeton

Talking shop with fund managers

We continue to meet with managers and add the updates on the website.

In July and August we tend to do less fund manager meetings. This enables us to do research on the existing holdings, and we will be including notes from this research on the website when it is completed.

General disclaimer: The data has been sourced from external sources and although we have looked to ensure this is as accurate as possible, we are not responsible for data they supply. The introduction piece is written in a personal capacity and reflects the view of the author, it does not necessarily reflect the views of LWM Consultants. Equally the views under talking shop are those of individual fund managers. Individuals wishing to buy any product or service because of this blog must seek advice or carry out their own research before making any decision. The author will not be held liable for decisions made because of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.