We are all influenced by early experiences in our careers. I think in the financial services industry this rings especially true. I joined Salomon Smith Barney’s (SSB) Private Client Group in the Fall of 1999 and began the training program that would last nearly six months. My first month as a Financial Advisor at SSB was March of 2000, which coincided with the market cycle top. For the next three years, the S&P 500 Index steadily declined exacerbated by the dot com bust, 9/11, and the subsequent accounting scandals surrounding companies like WorldCom and Enron. Talk about a rough start.
S&P 500 Index (SPX) – Daily – (1999-2003)
Looking back, I’m glad that I experienced a market crisis at the beginning of my career as it reinforced the importance of diversification and risk control. I remember reviewing numerous portfolios holding a few of the high flyers of the day, such as PMC Sierra (PMCS), Pets.com (PETS), Sun Microsystems (SUNW) and Global Crossing (GLBC), in which the investors felt well diversified. In the subsequent bust, the NASDAQ Composite Index lost nearly 80% from peak to trough.
NASDAQ Composite Index (CCMP) – Daily – (1999-2003)
In the end, it took the NASDAQ more than 15 years to eclipse the market high in 2000.
NASDAQ Composite Index (CCMP) – Daily – (1999-2015)
The bear market of the early 2000s combined with the technology revolution helped kick off the surge in passive buy and hold index investing. Understandably, investors were frustrated with the performance of their actively managed accounts as many advisors and investment managers were swept up in the euphoria and failed in managing risk.
Fast forward to the Global Financial Crisis, investors experienced déjà vu and were further frustrated by active management. A paradigm shift accelerated as more and more assets moved from active to passive buy and hold strategies just in time for the longest bull market in U.S. history. The bull market of the last 11 years further reinforced buying and holding as the best way to achieve success as an investor.
I believe passive investment instruments have a role in portfolio management. However, I am not certain most investors appreciate market cycles and the challenges that a buy and hold strategy may encounter going forward. Investors tend to understandably focus on their home stock markets but looking around the globe can provide insights and help place market cycles in context. Let us look at equity markets around the world to help illuminate the long-term efficacy of a buy and hold strategy.
Beginning in Europe, the German DAX has performed relatively well compared to its peers. The DAX Index reached an all time high in early 2000 but did not fully recover until 2015. The index managed to make a new all-time high in 2017 but has since struggled. The DAX is currently trading below levels reached in 2000 yet is considered the powerhouse economy in Europe.
German DAX Index excluding dividends (DAXK) – Monthly – (1991-2020)
The UK’s FTSE 100 Index recovered more swiftly than many others following the Global Financial Crisis, reaching new all-time high levels in 2015 and 2018. Following the 2018 high however, the FTSE 100 has been in a downtrend and is trading below levels seen in 1999, more than 20 years ago.
FTSE 100 Index (UKX) – Monthly – (1992-2020)
France’s CAC 40 Index has yet to surpass the all-time high seen in the year 2000. The index recovered in 2007 and 2019 but is trading today at levels first achieved in 1999.
CAC 40 Index (CAC) – Monthly – (1992-2020)
Spain’s IBEX 35 Index reached an all-time high in 2007, eclipsing the high from the year 2000, but has traded lower since. The IBEX is trading around 7,000, a level first surpassed in 1997.
IBEX 35 Index (IBEX) – Monthly – (1995-2020)
Finally, in Europe Italy’s FTSE MIB Index peaked in the year 2000 and has yet to challenge its all-time high. In fact, the FTSE MIB declined sharply following the Global Financial Crisis and has moved sideways ever since.
FTSE MIB Index (FTSEMIB) – Monthly – (1998-2020)
Turning to Asia, Hong Kong’s Hang Seng Index peaked in 2007 and did not make a new high until 2018, nearly 11 years later. The index has been in a downtrend since the peak in 2018 and is currently trading below levels last seen in 2007.
Hong Kong Hang Seng Index (HSI) – Monthly – (2001-2020)
Similar to Hong Kong, the Shanghai Stock Exchange Composite Index also peaked in 2007 but has yet to make a new high in the 13 subsequent years. In fact, the index is more than 40% below its all-time high value.
Shanghai Stock Exchange Composite Index (SHCOMP) – Monthly – (1999-2020)
As a kid growing up in the 1980s, I was aware of Japan’s growing economic influence in the world. Between reading my father’s Forbes magazines and listening to our Sony Walkman, it was clear that Japan was emerging as the dominant economy on the world stage. I had friends learning Japanese with the expectation that the center of global economic activity would be in Tokyo. However, Japan’s Nikkei 225 Index peaked in December of 1989 and subsequently fell nearly 80%. Any buy and hold investors are still waiting to get back to break even more than 30 years later.
Nikkei 225 Index (NKY) – Monthly – (1980-2020)
When looking at the state of equity markets around the world, one must question the long term efficacy of a buy and hold strategy going forward. Up until now the U.S. has been the exception, but, as we have seen, many equity markets around the world have made little progress in the last two decades. When adjusting these market returns for inflation, the picture becomes even more bleak.
Following the crash of 1929 and the Great Depression, the S&P 500 Index took 25 years to make a new high.
S&P 500 Index (SPX) – Monthly – (1927-1954)
The global economy is in unchartered waters exacerbated by the Covid-19 pandemic. Never in human history have interest rates been so low for so long. Despite drastic stimulative measures by governments and central banks, many economies have struggled since the Global Financial Crisis. Low interest rates have encouraged the buildup of debt, serving to weigh down economic growth.
Early in my career I had success in a niche market, introducing European investors to the U.S. stock market. Electronic trading was new and private bankers held sway over European markets and I saw a way to fill a niche. Unfortunately, it didn’t last long as the dot com bust took hold. It occurs to me that today, investors all over the world can easily access and trade the U.S. equity markets with the click of a mouse. As we have seen, the U.S. is one of a few global stock markets where investors are earning a return on their capital and able to capitalize on the current uptrend. The world may currently be too dependent on one stock market. It may be time to revisit diversification and implement a process to avoid catastrophic drawdowns. I wouldn’t want to buy and be left holding the bag.