U.S. stock markets: caution and moderation on the horizon?

10 October 2018 by Jean-Philippe Bernard
Bourse américaine

The ongoing U.S. stock market upturn has now been described as the longest bull market in the entire history of the S&P 500. This boundless optimism is the result of strong job creation, steadily rising profits and, on the whole, healthy economic conditions. Let’s remember that stocks are assets that anticipate the next economic cycle and, currently, our stock market barometer is forecasting good economic health in the future. When can we expect a reversal in stocks? It is always difficult to predict when this will happen and trying to do so will expose you to a risk of poor market timing which could worsen your final result. Investors: please refrain from making predictions!

The S&P 500: a guarantee of strong returns?

Though the S&P 500’s performance has been outstanding since 2009, this index has had its share of troubles in the past. To evaluate it, let’s see how its annualized return compares with that of Canadian bonds based on different time periods:

Index Period
  Jan. 2000 – Jan. 2009 Jan. 2009 – July 2018  Over the past 3 year
(July 31, 2018)
S&P 500 (SPY) -5.25% 15.49% 12.48%
Canadian Bonds (XBB)   6.24%  3.84%   0.96%


Source: Morningstar

A few notes from Morningstar: 

  • The annualized return of the S&P 500 from January 2000 to 2009 was disastrous: $100 invested in 2000 was worth $62 nine years later (an annualized return of -5.25%).
  • Recently, Canadian bonds have had their share of difficulties (see 3-year returns). However, when you look over the longer term, you notice that $100 invested in January 2000 was worth $164 nine years later (an annualized return of 6.24%).
  • Returns for the S&P 500 have been impressive since 2009.
  • Bond returns have been very weak for the past 3 years.

Diversify!

The disappointment related to bond performance over the past few years has led many investors seeking returns to abandon them in favour of stocks which are at historic highs. However, history tends to show that periods of strong performance hold a difficult future for unsuspecting investors.

Diversifying your investments is therefore paramount. The high level of stocks should indicate that the degree of risk has perhaps also hit its peak. In such a context, ensuring that you have the right portion of bonds in your portfolio will make it better diversified and significantly reduce its level of risk.

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Jean-Philippe Bernard is an advisor with National Bank Financial. National Bank Financial is an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX). The opinions expressed herein do not necessarily reflect those of National Bank Financial. The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The securities and sectors mentioned in this document are not suitable for all types of investors and should not be considered as recommendations. Please contact your Investment Advisor to find out if a security or sector is suitable for you and to obtain more information, including the main risk factors.

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