Morning Note: Market News and a Long-Term Investment Perspective.

Market News

This morning in Asia, equity markets were down across the board – Nikkei 225 (-0.5%); Hang Seng (-0.2%); Shanghai Composite (-0.3%) – led by China after data showed profit growth at the nation’s industrial companies fell by 7.8% in the year to end October versus the same period in 2022, missing a Bloomberg estimate for the decline to narrow to 6.8%.

After four consecutive weekly gains, the S&P 500 is currently expected to open down a touch this afternoon. Wall Street’s “fear gauge” — the VIX — dropped to 12.46, the lowest since January 2020. The FTSE 100 is currently little changed at 7,478.

Black Friday shoppers spent a record $9.8bn online in the US, Adobe Analytics reported. Online sales were up 7.5% from last year, boosted by demand for electronics, smartwatches, TVs, and audio equipment. Consumers leaned on buy-now, pay-later options. Focus will now turn to whether that momentum carried into Cyber Monday.

The Bank of England’s remit should be trimmed, its management should be streamlined, and greater “diversity of thought” encouraged, according to a House of Lords report. It said reform is needed after a string of “errors” that let inflation surge. 10-year gilts currently yield 4.25%, while Sterling trades at $1.2620 and €1.1520.

The oil price fell for a fourth straight day – Brent Crude is now $79.50 a barrel – ahead of this week’s OPEC+ meeting. CBA said the cartel will have to show significant supply discipline to alleviate worries of a deep surplus next year. The gold price has hit a 6-month high ($2,012 an ounce), helped by dollar weakness.

Source: Bloomberg

Investment View: Talkin Bout My Generation X

Hands up if you were born into Generation X; the greatest generation of them all?  If you were born between 1965 and 1982 you are likely endowed with both independence and resilience.  You are tech savvy but not tech dependent, you have conquered the impossible work-life balance while carrying both the boomers and millennials along for the ride.  Many a true word is spoken in jest.

While we all like to think that our own generation is special in some way, there is no doubt that the eighteen years from 1965 to 1982 were pretty “special” for equity markets.  Special in a “gut-wrenching sell-offs with sharp rallies but going nowhere” kind of way.

The Dow Jones Industrial Average 1965-1982

Source: Bloomberg

Roughly speaking, during the period there were three sell-offs of 25%, one of 35%, and one of 45%.  Each of these were followed by steep recoveries that undid the damage, but we never really made any progress.  This is an even more challenging environment for investors than that reflected in the end result. While it is tempting to think that you could have “traded” this market like a hero, the reality is that it is more likely that any attempt to do so would have led to an even worse outcome. The reason is that things would have felt great at the highs and terrible at the lows, making you psychologically more disposed to do the exact opposite of buying low and selling high.  The other thing to bear in mind is that eighteen years is a long time.

Dow Jones Industrial Average Deflated by US Consumer Price Inflation

Source: Bloomberg

The top chart is just the level of the Dow Jones Industrial Average in nominal dollars.  The second chart (above) measures the index in real terms by deflating it by the notoriously high inflation over the period, indexed to 100.  What looked like a volatile but sideways market, now looks like a trend.  And not a happy one.  The headline index fell 70% in real terms.

It wasn’t quite that bad because the charts above are not total return indices and don’t consider dividends.  The chart below takes this into account and has the total performance in real terms over the period at -40% and -50% at worst.

Total Return Drawdowns US Equities and Bonds

Source: Northern Trust

The shaded green area in this chart tells us that, as one would expect in an inflationary regime, bonds were no help either. Aside from market timing, there were things you could have done to improve your lot in this tricky period.  A reasonable allocation to commodities and gold would have made the world of difference.  Trend following strategies excelled.  However, sometimes investing is just tough sledding.  Despite what has crept into the public consciousness via a generation of index investing, financial markets exist to price and efficiently allocate capital, not guarantee retirement outcomes.  What if the US equity market is down 40% from today, in real terms, in 2040?  Or worse?  These are not predictions, just questions that need to be considered when building portfolios for the long term.  It will require resilience, independent thinking, and good humour.  A project made for Generation X.