Why have stocks produced decent longer-term returns out of bear markets?
In the not-too-distant past, a young person working in finance would have been deemed inexperienced by virtue of never having endured a bear market. Today, there is a whole generation in their early 30s who have never experienced a true and sustained bull market. They have seen temporary rallies from the dips, but these spikes ended in reversals that erased all or much of the prior gains.
These are certainly hard times. Unemployment is high. Growth is slow, and the world’s developed economies have accrued sizable debt. In the United States, we are dependent on political leaders, supported by ornery electorates, to engineer a debt reduction plan that does not choke off private enterprise, eviscerate social safety nets or undermine the global financial system.
It is also unsurprising that, for the most recent generation of investors, the benefits of a long-term investment horizon are closer to an unsubstantiated rumor than an accepted principle. The title of the book, Stocks for the Long Run, published in 1994, might seem like a joke rather than classic wisdom.
A long-term investment perspective tends to become unfashionable in periods when markets trade in a volatile, sideways fashion, as they did in the 1930s and 1970s. Ironically, flat and volatile markets can provide highly fertile ground for profitable long-term investing.
If we look at times of economic hardship, such as those of the ’30s or ’70s, the 10-year stock returns initiated during these periods tend to look quite strong, particularly following the initial market drops. We have certainly seen a number of such drops in the past decade.
Why have stocks produced decent longer-term returns out of bear markets? Partly, it is because they start at depressed values. The other reason is that stocks return dividends. Dividends, however, are small as a percentage of corporate earnings and cash flow. Companies, particularly larger, well-capitalized ones, are better positioned to maintain and grow dividends today than at any point in recent history.
For those in retirement, spending down their capital, a long-term time horizon may be hard to contemplate. Yet allocating to equities can still make sense in highly distressed markets.
People are living longer. Fixed-income assets are great for stability but, as the name implies, do not provide income growth. If the economy were to undergo an inflationary period, equity dividends would likely rise and could help to offset rising costs.
The need to formulate long-term strategies is not confined to investing. Wealth advisory professionals collaborate withclients and their other advisors on financial planning forecasts and estate planning options. As laws, regulations and circumstances change, numerous tactics can be employed to save money and advantageously transfer assets. Actions taken in this purview can prove to be as valuable as investment decisions.
These difficult times require that we not only measure and manage risks in the near term, but also incorporate a longer-term perspective that will benefit the future, reminding ourselves of the importance of thinking in terms of decades and generations. -CL-
Glenmede leverages its vast resources to provide highly customized investment, fiduciary and wealth advisory services to high-net-worth individuals and families, endowment, foundation and institutional clients, overseeing more than $20 billion of assets under management. To learn more, please call Chip Wilson, Executive Director of Relationship Management, for a personal conversation at 215-419-6100.