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In this issue:
- Global Equity Market Performance
- Worries
- Turn of Two Centuries
- The Roaring Twenties
- Wrapping Up
- Wealth Longevity – Mitigating Risk Through Smart Allocation
Global Equity Market Performance
In November, equity markets in North America outperformed the rest of the world. In December, that was reversed. All four global market indexes were flat or down. The S&P/TSX 60 lost 3.3% and the S&P 500 2.7%. So much for Santa Claus.
2024, however, was a good one. The S&P 500 and the TSX 60 were both more than 20% higher. MSCI Emerging Markets and EAFE lagged, up 15.2% and 11.6% respectively.
Our systems remain fully long both the S&P 500 and the S&P/TSX 60.
If you would like to stay current on our measures of trend and momentum in the markets we follow, please click here
Recently, both our clients and the media have been raising many questions about whether this market rally can sustain its momentum. That’s impossible to determine so we thought, for a bit of fun, we would look back to the elder twenties.
Worries
Stock indexes have been on a tear since 2022. And individual tech names are dominating performance. NVIDIA is up 900% over the past two years.
As we’ve mentioned in prior notes, one of the reasons the S&P 500 has outperformed the Dow and the TSX is its technology weight. We wrote about the ‘Magnificent Seven’ last year at this time. Back then, those seven stocks comprised 25% of the S&P 500. Now they are the top seven holdings at more than 30%.
In November we noted that NVDIA had surpassed Apple to be the most valuable company in the world. This has reversed slightly, but they are still the two biggest stocks around. This is being driven by the hopes surrounding artificial intelligence (AI).
One concern – there is too much focus on technology. Also, that things are moving too fast. And if AI investment doesn’t meet expectations, the entire market might be vulnerable. That is possible. Anything is possible. It’s also possible the rest of the market pulls up its socks and tries to catch up. Nobody knows.
We can look to history for some context.
Turn of Two Centuries
The following uses the Dow Jones Industrial Average since it’s the oldest broad market average in the U.S., created in 1896.
For the first 25 years of the 1900s it was stuck in a range. There was the Panic of 1907, the Great War and a simultaneous pandemic during this time. It didn’t really break higher and hold its gains until 1925.
During these decades, however, technological development was exploding. The first radio broadcast in the U.S. was on election night, November 1920. The big technology themes were, in no particular order: cars, electricity, radio and communications. Sounds familiar.
We had our dot-com boom in the late nineties. They had their WWW boom in the 1920s but it stood for Worldwide Wireless as advertised by RCA in 1921.
RCA might have been the NVIDIA of the Roaring Twenties.
The most recent WWW has had a lasting impact on the economy and has allowed for the wide adaptation of AI applications like ChatGPT.
From a financial technology perspective, the 1920s stock market became more accessible to investors as telephones and stock tickers became more prevalent. And in 1924 the first mutual fund was created.
Now, we can do all of that on our phones and ETFs are an inexpensive way to own diversified equity indexes. The downside: no more ticker tape parades.
So how do the early 1900s compare to our 2000s from a market perspective?
Here is a monthly chart that compares performance.
We are now 25 years into this new century and roughly 50% ahead of where the Dow was in 1925. Despite serious pullbacks: the dot-com fallout, 40%, the Global Financial Crisis, 50% and the 2020 pandemic panic, 40%.
Is this cause for concern or is the party just getting started, like the back half of the prior twenties?
The Roaring Twenties
If the past five years were like the last five years of the 1920s, the Dow would have gone from 28,000 to 104,000. This December it made a high just over 45,000. What if that was the top?
Another way to look at this is to track performance prior to a top that we know happened. The Dow peaked in August 1929. Let’s see how today’s market looks in comparison. To do that we overlayed the past ten years onto the ten years prior to the 1929 high.
From that perspective, 1920s Dow is 50% higher than 2020s Dow. It’s interesting that if this trend continues, we will meet up in six months without the dramatic spike – two different paths to the same result.
The current market is ahead of the first 25 years of the 1900s. It’s behind when compared to the ten years prior to the 1929 top.
The point of all of this is to put this market into some kind of context. The Roaring Twenties are well known as a time of speculative frenzy that ended dramatically.
Prior to that, there were many technological innovations that helped push the market to extremes. That part seems a bit familiar, so to a certain extent it’s worth exploring. And it’s fun to see the similarities of two eras one hundred years apart.
What’s next is the question we don’t try to answer, because it’s not possible.
Wrapping Up
What we’ve learned over the years developing systems is that attempting to build predictive models does not work. But using price behaviour to guide allocations to large liquid markets is effective at mitigating risk.
The short version: try to win by not losing.
This is based on simple math. If you lose 50% you need to make 100% to get back to where you started.
What other things can an investor do to manage the ever-present risk in markets. Let’s see.
Wealth Longevity – Mitigating Risk Through Smart Allocation
The idea of ‘winning by not losing’ is more than a clever adage; it’s a cornerstone of successful long-term investing. As highlighted earlier, a 50% loss requires a 100% gain to recover—a daunting challenge that underscores the importance of managing downside risks.
There are several ways to mitigate risk.
Diversification
Just as technological advancements have diversified our opportunities, so too should investors seek variety in their portfolios. Holding a mix of asset classes—stocks, bonds, alternatives or commodities—can help smooth out the ride. For example, while the S&P 500 has surged over the past year, other areas, like emerging markets, have lagged. Such divergences in performance illustrate the value of spreading investments across different sectors and geographies.
Rebalancing
Another crucial tool is rebalancing. Over time, market movements can cause certain assets in your portfolio to grow disproportionately large. This can inadvertently increase risk, as seen with the ‘Magnificent Seven’ stocks that now dominate the S&P 500. Regularly reviewing and rebalancing your portfolio ensures that no single investment takes on too much weight, keeping your risk profile aligned with your goals.
Downside Protection
This might include holding some cash reserves or investing in assets with lower volatility. For instance, bonds often act as a counterbalance to equities, offering stability during market downturns. While cash or fixed income may not deliver the eye-popping returns of technology stocks, they provide a crucial buffer when the markets become turbulent.
Discipline
In times of market exuberance or fear, it’s tempting to chase trends or make drastic changes. But history teaches us that steady, deliberate action is often more effective than reactive decision-making. Investors in the 1920s who diversified and maintained a balanced approach fared better than those swept up in speculative mania—a lesson as relevant today as it was a century ago.
By focusing on smart allocation and managing risks effectively, you position yourself not only to weather market storms but also to capitalize on opportunities when they arise. In the end, true wealth longevity is about playing the long game with a clear and steady strategy.
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