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Monthly Market Muhsings - June 2021

Markus Muhs - Jul 05, 2021
Another half a year is in the books.
After the remarkable turnaround year we had in 2020, who would have predicted that we would immediately slap on another 15% or so gain in just the first half of 2021? Here's where I remind everyone again that, even for a full year, 15% is well above the long-term average. The likelihood that we will see some kind of reversion to the mean (a negative number!) for the second half of the year seems greater than that we will do another 15%. High single-digits—maybe 10%—is the long-long-term average return of the markets. 30% years are the outliers.
Where reversions to the mean are concerned, you never know really what "mean" we might be reverting toward. Using March 1, 2009 (the bottom of the Great Financial Crisis crash) as a starting point, and June 30, 2021 as an end-point, the MSCI all cap world index, in USD, has compounded 15.06% annually. Well above longer-term averages. The S&P 500 compounded at an even more impressive 17.78% over that time period. Both numbers courtesy of Morningstar.
The S&P 500, however, lost about 5% annually over the decade prior (Feb 2000 to Feb 2009; start and end point are deliberately from tech bubble peak to GFC crash), and the 12+ years now of strong markets have reverted that mean to an average compound annual growth rate of 7.45% over the past 21 years. So, after 21 years, we may still be mean-reverting upward to the long-term average return for stocks.
I mention the S&P 500 above only because that number is readily available on Morningstar's Advisor Workstation for the past 21 years, whereas the MSCI ACWI is a slightly newer index. The MSCI EAFE index (Europe, Australasia and Far East; really mostly representing the markets of developed Europe and Japan) has a bit more history. It averaged a mere 4.08% (in USD) since Feb 2000. It outperformed the U.S. a little, with only around a 4% annual loss in the first decade of the millennium, but has only mean-reverted upward a pedestrian 9.9% annually over the "raging bull market" since then.
Ultimately, we won't know what we're mean-reverting toward until after the fact. Will 2021 end up being another big year in the markets? Are we going to see more strong years until the 21st century average reverts closer to 10%, or will we see the 2009-onward average revert back down to closer to 10%? Who knows?
I only try to glean what I can from others, maybe get a sense for where we are in the now. LPL Financial's Chief Market Strategist takes a look at the past and how the current year compares:
Perhaps further re-opening, especially in the world outside the U.S., is the catalyst to a good finish to the year? Keep in mind though that seasonally, the third quarter tends to be the worst and that the path to a good finish to the year might be a rocky next 3-4 months, then a nice "Santa Claus Rally". We'll see.
Callum Thomas recently tweeted out a graph comparing the current path of the S&P 500 with its seasonal average pattern, to give an idea. Don't be discouraged if we see sideways markets until late-fall, and keep in mind that such markets will of course come along with some kind of narrative ("set-backs" and whatnot).
Lastly, I wanted to bring readers' attention again to another one of Capital Groups' excellent quarterly infographic-reports. "Infographic-report" being my own terminology to describe them, since they stopped calling them "The Long View" some years ago. Anyway, their latest Mid-Year Outlook doesn't disappoint with some excellent easy to understand infographics that are not just looking at the here and now, but how it all fits into the long-term future.
You can see a summary of the report here, but I highly recommend downloading the full report in all of its PDF slideshow glory. Just looking at the colorful graphics alone will enlighten. Some highlights, along with my commentary (page numbers on bottom right of each slide):
  • Page 2 has a 30-year chart highlighting year over year price volatility of industrial materials. Doesn't look that much different than coming out of the last recession, with materials and industrial goods shooting up in price as businesses replenish depleted inventory.
  • Page 5 on "Value or growth". Something I've been harping on for a while, how we've seen two very different markets over the past year and a bit (and now we seem to be reverting back to growth). In my Elementum Portfolios I make a conscious effort to keep exposure to these two markets fairly balanced.
  • Page 7: while we've devoted so much attention to the leaders in disruption, I think there's plenty opportunity still in traditional companies improving their bottom lines by embracing the same disruption.
  • Page 9: while the pandemic has caused a lot of pain and suffering in the short-term, the upside potentially can eclipse that many times over. The 2020s could be to biotechnology what the 2010s were to information technology, or the 1960s to aerospace, all spurred on by the pandemic. By the end of the 2030s perhaps many more lives will be saved, or extended, as a result of the pandemic than were lost. Cap Group expands a bit on it in this article.
Investment Advisor & Portfolio Manager