- As we approach year end, the MSCI World and S&P 500 indexes are both decidedly positive for the year—despite being in negative territory earlier.
- We said earlier this year it's normal for some years to see the totality of returns come largely at the back end, and we thought that likely this year.
- Stocks' rally since the relative July low demonstrates how markets can move a long way in a very short time.
- Encouragingly for 2011, historical trends and positive fundamentals support a continuing bull market.
For at least the last couple years, a chorus of voices has said "staying the course doesn't work anymore" and "this time it's different." The correction earlier this year didn't do any favors to extant market jitters. But lo and behold, as we approach year end, what we do we see? The MSCI World and S&P 500 indexes are both decidedly positive for the year—despite being in negative territory as late as mid-September. The MSCI World has gained 11% for the year, while the S&P 500 has risen 14%.*
We said earlier this year it's normal for some years to see the totality of returns come largely at the back end, and we thought that likely this year. In our view, the PIIGS debt concerns are legitimate—for those nations. And the threat the European Monetary Union (EMU) could fracture is real, though highly unlikely in the near-term. With some legitimate weaknesses of the Lisbon Treaty shaken out and some fixes underway, the EMU for now is stronger, not weaker. Plus, against the backdrop of all those euro-centric fears, there were broadly improving global fundamentals. In our view, the positives globally vastly outweighed the legitimate areas for concern. Add that up, and you have a recipe for a strong, back-end stock rally.
Stocks' rally since the relative July low demonstrates how markets can move a long way in a very short time. Investors who bailed out of stocks during the correction, predicting a negative annual return, missed the rally. The market has a way of rewarding those who can tolerate short-term volatility—and, conversely, frequently punishing those who think they can time the market around (what turn out to be) lightning-fast downturns.
2010 wasn't without serious risks—the world never is. But focusing exclusively on risks to make investment decisions can be detrimental to long-term financial goals. Legitimate risks must be weighed against the full spectrum of global drivers. Investors driven solely by risk aversion to the exclusion of all other factors aren't likely to see much long-term growth. It's normal for our levels of risk aversion to fluctuate given our experiences, but smart investors train themselves to see beyond personal biases and fears. They know it's usually not so very different this time.
Encouragingly for this bull market going into 2011, history shows the S&P 500 hasn't had a negative annual return in the third year of a president's term since 1939—though of course anything can happen. But positive fundamentals like healthy global economic growth, strong corporate profits surpassing expectations, and surging global trade should provide nice tailwinds for the near future.
*Bloomberg Finance, L.P., as of 12/20/2010