The message from the stock market is clear. The new market cycle is punishing static asset allocations and passive strategies. Experts like BlackRock expect a decade of low returns in the indices. This means up and down repetitive waves and goodbye to the bull market.
Here are the facts: The S&P500 recorded a first wave down January to October 2022 from 4,790 to 3,577 (that is minus 1,233 points or equal to down 25%). Then comes the current wave up since October from 3,577 to 4,123 as of today (up 546 points for a 15% rise).
How long can this up move last? Even more important, when the next down leg comes again, how far can it go ?
In our new market regime, asset managers and asset owners must decide between two options:
- Do nothing, keep the status quo, continue to use the same conventional investment framework that worked well in a bull market but positioning yourself to be at the risk of being held hostage to volatile, extreme price swings of the indices. The outcome will be high volatility, low returns and well below inflation, potentially for years. History can offer examples of similar scenarios.
- Accept the fact that a change is required. Adopt a more active and dynamic investment approach by starting to use more advanced analytics and investment tools that can help to navigate the ups and downs either at the allocation level or at the securities selection level. In other words, refresh your information flow.
History can offer guidance about what to expect. After every bull market the indices experience years of sideways moves:
1968 – 1982 (14 years): The annual return for the Dow Jones Industrial Average was 0.83%. Best year +31%; worst year -29% with 6 negative years overall.
1999 – 2010 (10 years): The annual return was 0.7%. Best year + 26%; worst year -38% with 4 negative years.
The decision should be a no-brainer. Ignoring to evaluate any potential new source of intelligent insights, especially in challenging market environments, is unsafe and disconnected from the new reality. Smart investors will understand they need more revealing insights and need to start using advanced analytics and new generation tools that can better capture the ups and downs in the changed cycle.
They also realize that active management can profit from the performance dispersion across stocks in any phase of the market. Even in 2022 with the S&P 500 index down 19%, the top 25% performers of the index posted an average gain of 21% .
Selecting the winners requires discipline and a rigorous methodology that combines solid company fundamentals and a robust validation of a positive trend in action. Acknowledging and respecting trends is sound practice. Capturing trends is the essence of successful investing. Ignoring trends is negligent and very dangerous in this current market cycle.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.