A Record-Breaking Bull Run for Equities
The current S&P500 bull market is the longest one in history—but the longer the equity markets continue to rally, the greater the certainty that a market correction will materialize.
For many investors, this means that an equity investment approach that focuses on risk-adjusted returns may hold increasing appeal in the years ahead.
On August 22, 2018, the current S&P500 bull market became the longest in history, exceeding the previous record—set by the dot-com bull market in the early 2000s—of 3,452 days.
The record-breaking length of the current bull market is certainly notable. Perhaps even more remarkable is its global reach. As the chart shows, equity markets in every major region in the world have rallied since their March 2009 lows.
A genuinely global equity bull market like this is extremely rare. For example, during the last bull market—the technology bubble of 2000s—Japan was left out, because a real-estate and stock-market collapse led to a long period of economic stagflation. Over a ten-year period during the course of the technology bubble, the Japanese market went up only 24%. In comparison, the Japanese market is up 153% over about the same amount of time in the current bull market.
So what does this long-running, global equity-market rally with impressive cumulative returns mean for investors? Unfortunately, the longer the equity markets continue to rally, the greater the certainty that a market correction will materialize. This correction is likely to lead to a period of lower expected returns for equities. In a recent analysis conducted by State Street Global Advisors, fourteen of the leading investment banks and investment managers foresee annual returns of only 4% to 6% over the next five to 10 years.2 This suggests that investors’ desired outcomes are likely to shift from return on capital to return of capital—i.e., protection against drawdown potential—in the coming years.
The potential for a correction is underlined by an uptick in volatility, which we believe is likely to be persistent. Even leaving aside recent volatility in US-based FANG1 stocks, we have already experienced a more volatile environment. In February 2018, volatility spiked over the first week of the month, with the VIX index jumping roughly 24%.2 History suggests that these kinds of volatility spikes presage higher volatility more generally. Indeed, the relationship between current and future volatility is much stronger, on average, than the relationship between current and future stock prices.3 For many investors, this means that an equity investment approach that focuses on risk-adjusted returns may hold increasing appeal in the years ahead.