The argument went that the sharp cycles in shares were based on shallower and shorter cycles for economies. They might give you a bad time for a year or two if you bought at the top of a market cycle and immediately fell into a bear market, but the next cycle would see the index comfortably exceed the old highs. Recessions might last for a few quarters, with GDP dropping a few percent, to be followed by a recovery to new highs. Today this assumption about equity markets has taken something of a beating.
It remains true in the US that if you had bought badly you would now be in the money. Nasdaq has soared to spectacular new highs and the S&P 500 also reached a new peak despite the deep damage done by the lockdowns to the US economy. We have just witnessed an unprecedented fall in GDP – and may have to watch several quarters go by before we claw back to where incomes and output were – yet the stock market has already surpassed itself. It is looking to a more prosperous future despite the scarring from lockdowns and social distancing. It is also true that in Brazil and Australia shareholders were offered new highs in February this year before the onset of the virus.
For the last thirty years there was one hard case that did not follow the adage that shares make you money in the longer run – even if you bought at a peak in the market. Japan has never got anywhere near the old high of 38,957, hit by the Nikkei Index in December 1989. Powered upwards by plenty of money and huge confidence, Japanese financial and property assets reached giddy levels which have never been seen again. The authorities burst the bubble, sustained in the 1980s by excessive lending and unrealistic views of asset values. This ushered in a long era of low or no inflation and a share market which traded around half its previous high.
A difficult start to the 21st century
Today we need also to add the poor performance of a number of other important stock markets this century. The French share index is still more than a quarter below its high in September 2000, twenty years ago. The Italian Index is under half its peak of April 2007. The Spanish Index as well rests at under half its high of December 2007. These EU country indices have been beset by slow growth, by the lack of new technology companies in their quoted universe and by the monetary policy effects of the Euro on them. In contrast, Germany has managed a new high as recently as February this year, as it accumulates surplus funds at the European Central Bank and adds to its success as a net exporter of engineered products. The UK too achieved a new high in 2018, benefitting from its independence from the Euro system and the international profile of its quoted companies.
Most surprising of all is the behaviour of the Chinese stock market, as measured by the Shanghai composite index. The Chinese economy has outgrown most of the rest of the world consistently over the last fifteen years. It has recovered more quickly from the virus, as the pandemic hit China first. The authorities have been largely accommodative of growth and rising wealth. Despite this, the equity index is around half its high in 2007 – and still well below the lower peak achieved in June 2015 when the authorities allowed excessive credit and broker loans to boost shares. It is true the index has much representation in banks and the older sectors of the economy, which accounts for some of the shyness in its value. Shares in the newer Chinese economy have done better.
So, we see a world split into three. On its own is technology-heavy US, where the Nasdaq not only went to a new high at the end of the last economic cycle as the virus struck but has now already gone to a new high for the next cycle, the recovery cycle from the virus. In the US, some argue for this bullish outcome based on an optimism about the speed of the recovery. They do not want to miss out. Others base it on the way most of the technology sector did not merely escape the worst of the virus downturn but in many cases gained accelerated growth from what happened to individual lifestyles.
Next comes a range of markets including Brazil, Germany, the UK and Australia that made new highs towards the end of the last economic cycle, but have not yet got back to those levels as recovery from the pandemic moves forward. Many think it a realistic expectation that they will see a new high this cycle when their recoveries are more advanced and better assured. There is then a third larger group of markets that have not made new highs for between 13 and 40 years, where it did matter very much when you bought them. What went wrong in previous cycles for them? Could it go wrong again?
The extreme movements in markets lead experienced investors to ask if we are due a correction. Can these technology shares continue to attract so much support and momentum? Aren't the more traditional sectors and economies due some investment? The trouble is world governments are committed to the Green revolution, and world consumers are committed to the digital revolution. Amazon continues to take market share away from traditional retailers every day, offering us a cameo of the long reach and compelling proposition put by many digital giants. This makes it difficult for the third group of country share markets to limp back to old highs as they watch Nasdaq storm on to another new one.
Maybe we will see a phase when fortune favours the laggards, but history implies we could reach a general downturn in markets brought on by tougher policy action from governments and central banks before we see a new all-time high in Tokyo or Rome.
The conundrum of China is the most curious. From an economic standpoint China has got a lot right this century, yet a general index which represents the traditional sectors more than the growth sectors fails to reflect the significant industrial and financial achievement. Today we can no longer rely on every cycle producing a new high in every major stock market. We have to keep under constant review the extent of the markets' passion for growth and the possibility that one day more investors will see more value in the rest.
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Do shares always win in the long run?
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