Global equities have rallied notably over the past few weeks. A better-than-expected US job data helped the S&P 500 Index erase all year-to-date losses and sent the Nasdaq Index to all-time highs.
While the MSCI World Index is still down by some 3.6 per cent year-to-date, it has posted a strong recovery from its 31.8 per cent drawdown back in March. In this article, we look to shed some light on the current market regime from a historical perspective.
We also took the opportunity to reiterate the importance of investing progressively and discuss how investors may consider positioning themselves at the current juncture.
At the peak of the sell-off back in March, we have put up a few pieces of articles to provide investors with a historical perspective of equity markets’ movement and while advocating investors to invest progressively.
Currently, considering that many of the equity markets are making decent recovery progress, we thought it would be interesting to look at equity markets from a numerical perspective again. In this study, we have utilised the S&P 500 Index as a proxy, with returns in US dollar terms excluding dividends.
On a rolling 5-day basis, since 1927, the S&P 500 has recorded 21 instances of returns exceeding 15 per cent. The index recorded a 17.4 per cent gain on March 30, 2020, which is the ninth highest in the history.
Oppositely, the S&P 500 has recorded 23 instances of losses exceeding 15 per cent. The index posted losses of 15 and 18 per cents on March 20 and March 12, 2020 respectively, which are the 14th and 11th sharpest drop in history. The last time the index recorded a five-day loss or return exceeding 15 per cent was back in November 2008.
On a longer rolling 30-day basis, there were 132 instances of returns exceeding 20 per cent. Out of those 132 instances, five were recorded in 2020, ranging from 20.6 to 27.1 per cent.
The last time this occurred was back in April 2009, where the S&P 500 Index clocked 27.2 per cent returns. On the other hand, the number of instances with losses of the same magnitude was considerably larger at around 227. Given that we have witnessed one of the fastest bear markets in the history this year, it is not surprising to witness 16 instances of returns exceeding 20 per cent in loss year-to-date.
From a volatility perspective, the annualised volatility of the S&P 500 Index is now threading at around 32.6 per cent, up 25.4 per cent since the low back in February 2020. Summing things up, it has been a wild journey for investors in 2020.
The benefits of investing progressively
As the S&P 500 Index moves to erase all year-to-date losses, we thought it would be interesting to take a look at how global equity investors fared in 2020. We have utilised the MSCI World Equity Index as a proxy to this study.
For instance, an investor invests one dollar every day since the first day of 2020, the return profiles of each of those dollars as of June 9, 2020 are portrayed in Figure 5. To date, there are 160 data points available, the average and median figures are 8.1 and 6.6 per cents respectively.
The worst investment day was on February 12, where the MSCI World Equity Index clocked an all-time high. The investment made on that day is sitting on a six per cent loss.
As the episodes of the virus outbreak unfold, we have been advocating investors to invest progressively and stay the course. Assuming an investor dutifully put US$1,000 to work at the beginning of every month, he would have contributed US$6,000 so far throughout 2020. How did those investments fare?
The US$6,000 would have grown to about US$6,474, which is a 7.9 per cent gain year-to-date. The MSCI World Equity Index is still down by 3.2 per cent year-to-date, which marks a double-digit difference between the benchmark and the investor’s portfolio performance. While this is a short-term example in a volatile market environment, it has nonetheless demonstrated the benefits of investing progressively and the importance of staying the course.
The dollar-cost-averaging strategy will not work all the time perfectly, but for 2020 it has managed to help investors to avoid making grievous attempts to time the market.
For buy-and-hold investors, although the ride was undeniably painful, staying prudent and patient have saved them from panic selling their investments during distressful periods. Nevertheless, having at least an investment plan helps investors to deal with their portfolios rationally and avoid emotional decisions.
The way forward
With equity markets rebounding strongly from their March lows, it may be a good time for investors to review their portfolios. Investors that have taken the opportunity to rebalance their portfolios into equities over March and April could be looking at a higher equities-to-bond ratio relative to their initial target allocation.
As valuations have crept higher on the equities front, they may consider trimming excess equity exposure and relocate those back into bonds.
For investors who are seeking long-term growth opportunities, we think Asia and emerging markets are attractive avenues to consider. Within equities, we are maintaining a positive view on Chinese equities as the nation remains on track to emerge from Covid-19 crisis with ample policy space to mitigate unforeseen externalities in the uncertain times ahead.