Readers of this blog will know the importance we give to taking a long-term perspective on the markets.
That’s why each year we review the summary of the UBS Global Investment Returns Yearbook. The yearbook is a remarkable resource that looks at historical returns from 35 global markets back to 1900.
This year’s edition is the 25th. Historically, it was published by the Credit Suisse Research Institute and authored in collaboration with Paul Marsh and Mike Staunton of the London Business School and Elroy Dimson of Cambridge University. We’re grateful that UBS decided to continue its production and the collaboration with its authors after merging with Credit Suisse in 2023.
One of the topics explored in this year’s edition is investment risk and the extremes of global market performance—both good and bad—dating back to 1900.
Investors take risk to earn returns, but sometimes market volatility can test the nerves of even the most experienced investor. That was certainly the case in 2022, one of the worst years for stock and bond returns.
Indeed, the yearbook shows that U.S. government bond performance in 2022 adjusted for inflation was the worst since 1900 by a margin of about 15 percentage points. The real return for U.S. bonds was about -35% versus an average historical return of 2.2%. Unfortunately, stock returns were also dismal in 2022. The U.S. stock market generated a real return of about -30% versus an average of 8.4%.
It’s unusual for bonds to be more volatile than stocks as we see in the data provided by the yearbook. The six worst episodes for stock market investors were the 1929 Wall Street crash and Great Depression, the 1973-74 oil shock and recession, the popping of the dot.com bubble in 2000-02 and the global financial crisis of 2008-09.
Since the turn of the century, we’ve had our fair share of tough times. The yearbook notes: “In its 24-year life, the 21st century already has the dubious honor of hosting four bear markets, two of which ranked among the four worst in history.”
While this observation is enough to give any investor pause about the riskiness of stocks, it’s important keep sight of two lessons from market history.
First, stocks have always recovered from bear markets and gone on to reach new highs. However, the time to recovery has varied greatly.
In the U.S. stock market—by far the largest in the world—the recovery has occurred in a matter of months, as was the case after the COVID bear market of 2020, or over a period of years, especially if inflation is taken into account.
For example, after the tech bubble burst in March 2000, it took seven and a half years from the start of the bear market to full recovery in July 2007. Soon after, the financial crisis hit, causing another collapse. This time, it took four years for the market to recover. Together, the two bear markets made up what’s know as the lost decade in U.S. stocks.
The second lesson is that the good times in the stock market tend to last longer than the bad times and generate much better gains than the losses experienced during bear markets. The yearbook provides data on four “golden ages” for the stock market investors, each covering a decade. They were the recoveries following the first and second world wars, the expansionary 1980s and the 1990s tech boom.
Real equity returns in the 1980-89 period were 357% in the U.S. market and 247% globally. The 1990-99 tech boom produced 276% gain in the U.S. and 114% globally (a number dragged down by poor performance in Japan). The conclusion? To participate in market recoveries and benefit from the good times, you must remain invested through the shorter, but painful bad times.
As we saw in a recent blog post, stocks are not risk-free even over long periods, but they give you the best chance to outpace inflation and increase your wealth in real terms. Global diversification and disciplined rebalancing will soften the blow of negative periods in the markets and allow you to enjoy the longer, more profitable upsides.
If you’ve been investing for some time, you’ve already experienced both good and bad periods in the markets. When the next bear market occurs, it’s important to recall market history as well as your own personal experience. Those reflections will help give you the confidence to remain patient and avoid missing the next upswing.
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