Of late I have had some clients concerned that this year we will see a correction or a crash in the world stock markets. It is impossible to predict the future. History does repeat itself – but often with a twist.
Sarasin of London, citing Robert Schiller and Bloomberg, presented the following:
The duration of bull markets are on average just under 6 years. At present we are approaching 5 years. The shorter bull markets were from 1906 to 1909 – 3 years – and 1969 to 1973 – 4 years. The longest bull markets were in 1948 to 1961 and 1987 to 2000 – each over a period of 13 years!
To what extent; how much will the markets increase in value? The average is about 250%.
The longer bull markets increased more than 800% while the shorter ones – for example 1969 to 1973 – increased just short of 100%. Currently we are at about 140% from the base values of the last bear market.
A significant value to monitor is the price earnings ratio (PE ratio). Markets tend to get over exuberant and with relatively high PE ratios they can stall and crash.
On average, market valuations peak at a PE ratio of roughly 22. At present we are at a PE ratio of 18. Having said that, the 1982 to 1987 bull market peaked at a PE ratio of about 26. The 2002 to 2007 bull market peaked at about 29 and the 1920 to 1928 peaked at about 32. The best of all – the dot com crash from 1987 to 2000 – peaked at a PE ratio of just below 40!
A crash or correction normally happens when there is a dislocation in the markets which then leads to some sort of crisis. It could be financial, it could be war. It could be something insidious; a change in social norms.
One aspect that today’s markets differ significantly from the past is the way that major central banks have been printing money to inflate their way out of recessions. Governments have never been more dependent on taxes (VAT as well as personal and company) and they simply cannot afford recessions. Hence the printing of money!
The value of company shares may still go up considerably, but as long as their earnings can keep up, company valuations should remain firm and bullish.
One cannot say when exactly the next correction or crash will occur. That is why it is not wise to commit all of your capital to the stock market. It is sensible to have a balance between equities, property, bonds and cash. What exactly that balance should be depends on your circumstances and perceptions. There is no one-solution-fits-all.
Lastly, a comment on Index Funds which have recently come into vogue: Index Funds track the market. They minimise management risk of underperforming the market. They are cheaper to run and by and large they are more economical to use than equity funds run by fund managers. That is “by and large”. If you have a good financial adviser who is monitoring your portfolio and advising on changes to its composition, you should be able to enjoy better performance – after fees – than the vanilla Index Funds.
In closing, if you think that there is going to be a market crash you may not want to track the losses with index funds! Index funds have their place and how wonderful they would have been if you had put all your money into one in 2009. R1 000 000 then would be about R2 400 000 now!
You need balance and good talent to deal with the future. That is where the team at Pinto Russell comes in.
Nick Russell
Certified Financial Planner CFP®
Please note: This article does not constitute advice