Unless specified otherwise, all performance and market data are sourced from Bloomberg. For all indices, performance reflects total returns which is change in price plus reinvested dividends and/or interest, if any. MSCI index total returns are shown net of dividend withholding taxes.
A Bull Market Ages – Feast or Famine?
“Joseph was thirty years old when he entered the service of Pharaoh king of Egypt. And Joseph went out from the presence of Pharaoh and went through all the land of Egypt. During the seven plentiful years the earth produced abundantly, and he gathered up all the food of these seven years, which occurred in the land of Egypt, and put the food in the cities. He put in every city the food from the fields around it. And Joseph stored up grain in great abundance, like the sand of the sea, until he ceased to measure it, for it could not be measured.” Genesis 41:46-49
On March 9, 2016, the U.S. equity bull market reached its seven-year anniversary. Since the depths of the 2008-09 financial crisis (3/9/2009), the S&P 500 returned 241.3% while Barclays US Aggregate returned 36.4%. It has not been smooth ride for U.S. equity investors as there have been multiple drawdowns of 10% or greater (Exhibit 1) over this seven-year bull market. More recently, the sell-offs in August/September 2015 and January 2016 led to drawdowns of 12% and 13%, respectively. This bull market has had its share of potholes as the global economy has yet to find surer footing following the last recession.
Exhibit 1 – S&P 500 (3/9/09 – 3/09/16): Maximum Drawdowns (Local +/- 60 Days)
The reference to Genesis is not to suggest that the markets will be entering into a Biblical seven-year cycle of famine following seven years of feast. However, like Joseph, investors, particularly those drawing upon their investments for income, should consider stockpiling ‘returns’ as this bull market ages in the face of increased economic uncertainty…and in the face of dwindling income options. As the world continues to grapple with the deflationary forces resulting from the massive debt build up from the prior cycle, world central banks have resorted to unorthodox monetary policies to stave off renewed risks of recession. More recently, several central banks have implemented negative interest rate policies (NIRP):
Central banks that have announced negative deposit rates:
The purpose of negative rate policies is to jump start financial institutional lending, rather than parking reserves at the central banks. So far, negative rates have not reached the retail deposit holder, although there were some reports of negative mortgages in Denmark. With respect to the U.S., the Fed has entertained negative rates as a policy tool to deal with further downdrafts in global weakness. The global financial system is increasingly geared towards borrowers over lenders, as long as the borrower is a safe credit.