October marks the fifth year of the bull market in global equities following the worst three-year decline for common stocks since the Great Depression. And what a ride it’s been since the market low on October 9, 2002.
Over the last five years, the S&P 500 Index has gained a cumulative 101.5% while the Russell 2000 Index of small stocks have rocketed 132.3%. But those returns literally pale compared to the MSCI World Index, up 165% since October 2002. The MSCI World Index is based in local currency but is also available in U.S. dollars and euro. Of that 165% total return, about half of the gain has been generated from the dollar’s decline against the euro, pound and other currencies in Canada and the Pacific.
If you think that return is impressive, wait a minute…
The MSCI Emerging Markets Index, which also bottomed five years ago, has gained a spectacular 441% over the last 60 months. Driven by the boom in commodities, surging exports and the strongest global economic cycle since the early 1970s, the emerging markets are the best-performing equity class this decade. Currencies in the index have also rallied since 2002 but far less than the euro mainly because of regular central bank intervention designed to keep their exports competitive with China.
However, all bull markets come to an end. The current stock-market cycle is already long in the tooth at 60 months. Historically, bull markets average 56 months dating back to 1942. If it’s any solace, the last bull market, which ended in March 2000 also defied history lasting 113 months.
The good news for investors this time around is booming global money-supply growth and generally low interest rates compared to ten and twenty years ago. Despite the sub-prime crisis and the real estate bear market in the United States, stocks have continued to hit new highs worldwide this fall as bank credit remains largely buoyant and available to most borrowers. Compared to stocks, most asset classes, except commodities, offer poor alternatives.
But heading into 2008, more stock-market turbulence is likely as sub-prime returns to the fore with about $500 billion dollars’ worth of resets. That event will cause more market volatility because participants are under the impression the Treasury is cleaning-up the mortgage-backed mess with Friday’s announcement of a $100 billion dollar bailout fund created by several banks. That amount won’t do the job.
The fourth quarter is historically the best three-month period for stocks. This year might be more muted because of September’s strong performance. Heading into 2008, the party won’t be as frolic as more mortgage woes come back to haunt global investors. Stay asset allocated and remember -- cash is not trash.
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