A 2020 Rhyme
History doesn't repeat itself, but it often rhymes.
The quote above has often been attributed to American writer Mark Twain, although its actual origins are unclear. However, it provides insight to what we tend to experience — that is, while details of events may change, there are usually many similarities to what has happened in the past with what is happening in the present. Perhaps it can be due to human behaviour, where we tend to make similar mistakes over and over again; for instance in investing many fall into the trap of “buying high and selling low” repeatedly, despite suffering the consequences over and over again.
Speaking of rhyming history, 2024 is beginning to look a lot like 2020;
We are again experiencing a range of all-time market highs. (Global equity markets hit all-time highs in Aug 2020 then, a mere 6 months from the pandemic lows.)
Taylor Swift has won Album of the Year at the Grammys.
Federal Reserve looking to cut interest rates.
Kansas City Chiefs beating the San Francisco 49ers at the Super Bowl.
A range of geopolitical tensions.
And yet another Biden vs Trump election contest in November.
Something we certainly hope that we don’t experience again will be another COVID-19 pandemic this year!
Despite all the crises that we have gone through over this short span of time, investors who stayed the course during this period, who did not panic, and maybe even allocated money during the turbulence, would be sitting on pretty decent returns. For e.g. the global stock index shown below, is up by around +40% since the beginning of 2020.
Source: MSCI, Dimensional Fund Advisors, GYC. Index returns do not represent the results of actual trading of investible assets/securities. MSCI maintains and calculates indexes, but does not manage actual assets. The calculation of indexes and index returns may deviate from the stated methodology. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the index or Index Linked Investments.
On the topic of US elections, one thing that you can count on happening again would be the noise and furore surrounding it. We should expect plenty of opinions and predictions surfacing as we approach the voting day. Within the financial and investment industry, this would inevitably include the discussion of its potential impact on markets. But should elections influence long-term investment decisions?
If we had learnt nothing about the accuracy and power of predictions (feel free to refer to our previous articles on this year — So Here’s The Market Outlook for 2024, What Surprises Will 2024 Bring?), pictured below in the diagram is a recap of when investment forecasters were so off the mark in predicting the impact of potential candidates on market performance. This was back during the Clinton vs Trump contest. Almost none of the predictions played out the way it was expected.
Source: CNBC, GYC.
The chart below stacks up the monthly returns of the US market from 1926 to mid-2020, almost a century of historical data. You can see that there have been months with large drops of more than -20%, and also months with large gains of more than +20%. The bulk of the returns falls between -4% to +5%.
The coloured bars denote when a Republican (red) or Democrat (blue) won the presidential contest. Can you spot a discernible pattern? I certainly cannot.
Monthly returns are usually quite short-term and could be affected by any number of other events. So if we were to look at the market returns during the tenure of the individual presidents, it may tell us a different story.
The chart below shows the annualised return of the S&P 500 index from 1929 to present, and again, there does not seem to be a pattern we can rely on to position investments in a way based on who will possibly be elected. It appears that whether a Republican or Democrat is at the helm, stock market returns still appear random — albeit positive for majority of the time.
It is natural to be worried about the election and what could happen this year or the next. In fact, there are so many worries to contend with. It’s a valid response to uncertainty.
However, don’t allow those worries to alter your investments unless your financial plan calls for it. History may rhyme, but we know from an investment context — events that have happened in the past, even if similar to what is happening today, may not lead to the same market reaction.
If you would like to find out more about the indicators we track and what really can affect your portfolio, come and have a chat with us.
