Nowadays the stock market is battleground for robots and algos to unleash their quantitative wrath. Investing in the stock market after the great reflexivity period of the 80s and 90s is becoming fool’s errand, as the charts below illustrate.
Many investors still have memories of the long 90s bull market and associated performance. Although the current bull market may appear similar in duration to the 90s uptrend, its strength is significantly lower in the sense of realized returns over typical investing horizons. Below are charts of S&P 500 index (no dividends) that illustrate these facts:
The yearly chart above shows the 7-year rolling return. After a long period of reflexive investing that started in the 70s, market abandonment began in 2000 and peaked in 2009. Central banks had to intervene to prevent massive collapse. However, in 2017 distribution started again slowly, as shown in the chart.
The 7-year return (before dividends) peaked at 237% in 1999. In 2015 the same return reached as high as 125% but since it is on the decline towards the mean of about 70%. Below is the chart of the total return.
The 7-year total return peaked at 292% in 1999 and then the abandonment phase began. The 7-year return fell as low as -10% in 2009 only to rise after massive central bank intervention. In 2015 the 7-year total return peaked at 163% and since it is on a downtrend.
The S&P 500 chart below (no dividends) shows the 15-year return.
The peak of the 15-year return was in 1999 at 779% and since a significant downtrend has started. Despite central bank intervention, the 15-year return is now at 134% after a peak at 204% in 2017.
Getting anywhere near realized returns before the abandonment phase would require much more than central bank intervention. In fact, this may not even be possible. Survival of the markets will depend on whether investors will be willing to settle for much lower returns. Central banks attempt to justify those low returns by guaranteeing lower risks. But this is a complex system and hard to predict what might happen in the future.
In our opinion investing in the stock market is at this point a fool’s errand. This market is a battleground for quantitative strategies, artificial intelligence and machine learning. This is NOT the market everyone was impressed by in the 1990s. The party in equity markets is over long ago and indexes remain high due to concentration if a few key names. Especially confused are some trend-followers who evaluate models based on performance in the 80s and 90s and rely on ensemble averages that are distorted significantly. See this article for more details. The main force behind high returns is usually reflexivity and not the economic factors academics and some investors think they play a role. And reflexivity is unlikely to come back with the same strength as in the 80s and 90s. Anything is possible but a return to the party days is unlikely.
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Charting and backtesting program: Amibroker