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This is a great moment to think about raising your 401(k) contributions, making your 2022 IRA contribution, or hiking your current retirement plan’s allocation to stocks.
Really, you may say? In a meltdown like this?
The simple response is: Yes, exactly.
The latest “global fund manager” survey from BofA Securities confirms what even a casual glance at the financial news should already have made clear: Markets have already fallen so far, and so many investors have already bailed, that future returns over the next 5 to 10 years or more are highly likely to be pretty good.
Read: Fund managers ‘scream capitulation’ as cash levels rise to highest in 21 years, Bank of America says
In other words, over the sort of time horizon that matters for ordinary people who are tucking money away for a retirement that may be one, two or even more decades into the future.
The Vanguard Total World Stock ETF
VT,
a low-cost, broadly-based index fund that tracks the world’s developed and emerging stock markets, is down by 23% since the start of the year.
The latest survey of worldwide professional money managers “screams macro capitulation, investor capitulation, start of policy capitulation,” reports Bank of America. Managers are holding the highest levels of cash and equivalents (such as Treasury bills) since early 2001, while their investment levels in global stock markets are now “three standard deviations” below the averages of the last 20 years—a statistical measure meaning really, really low.
Their least favored markets are London (no surprise) and the eurozone (ditto), and their least favored stock market sectors include real-estate investment trusts, banks, telecoms companies and consumer staples.
This pretty much matches the doom-laden headlines we read every day, as yet another honcho predicts the end of the world.
Meanwhile the Investment Company Institute, the trade association for the mutual-fund industry, reports that ordinary investors have been cashing out of their stock market mutual funds and exchange-traded funds all summer.
We already know that, historically, you’ve done pretty well if you’ve just bought stocks when everyone else was selling (and sold when everyone else was buying).
We saw similar levels of gloom, doom, misery and panic during the 2000-3 bear market and the global financial crisis of 2007-9. How far are we into this? How much lower will things go?
Nobody knows. But the further you are from the markets, and the less you are actively trading, the less you should care.
Stocks fell about 50% overall during 2000-3 and 2007-9, and, yes, it is perfectly possible they will do so again. That would imply a further fall of about a third from current levels. So anyone thinking in terms of weeks, months or even a couple of years might reasonably stay clear.
Money manager John Hussman warns that the S&P 500
SPY,
would have to fall by about two-thirds from its start of the year peak just to achieve “historically run-of-the-mill valuations.”
But how much should that really matter to long-term investors?
For example during the 2000-3 bear market we’d reached this stage—a 25% decline from the peak—by March 2001. If you’d bought stocks then hoping for happy days you were way too early: Stocks would continue sliding for another two years, helped by the long lead up to the Iraq war. But…if you’d bought a global stock market index fund in March 2001 and then just forgotten about it within five years you’d have made a 44% return, and over 10 years 66%.
It was a similar story in the global financial crisis. We reached today’s stage, a 25% decline, by the end of September 2008, just after Lehman Brothers imploded. Once again, anyone who bought a global stock index fund then was also way too early: Markets carried on falling for nearly six more months.
On the other hand, someone who’d bought a global stock index fund then and forgot about it would have made 56% over the next five years and more than doubled their money—a gain of 123%—over 10 years.
To believe that stocks now represent a bad long-term investment—meaning over the next 10 years or so—you have to make some pretty strong pessimistic assumptions.
This is especially true when you look at U.S. value stocks, non-U. S. stocks, and (maybe most of all) non-U. S. value stocks.
The Vanguard FTSE All-World ex-U. S. ETF
VEU,
has risen a princely 3% over the past decade. Not per year, but total. Even measured in sinking currencies like euros it has risen barely a third.
In euros it’s back to where it was in 2007. In U.S. dollars, which is what U.S. investors pay, it is off by a third from its 2007 peak. Actually, European stock indexes overall have barely risen since the late 1990s.
Last year market guru and hedge fund honcho Cliff Asness calculated that the extraordinary outperformance of U.S. stocks over recent decades was less to do with their superior underlying performance, and more to do with them simply becoming more expensive. This was especially true of glamorous U.S. tech and “growth” stocks—the ones which have spent most of the last year imploding.
Meanwhile strategists at SG Securities calculate that non-U. S. stock markets overall now trade on a pretty cheap rating of just 11 times forecast earnings per share—fully a third cheaper than the U.S., on 16 times.
According to FactSet, Japanese stocks are now about as cheap in relation to earnings as they were during the depths of the 2007-9 crash and the 2020 Covid crash. South Korean stocks are selling for less than 10 times forecast earnings. BlackRock says the stocks held by its iShares International Value ETF
IVLU,
now sell an average of less than 8 times the most recent annual per-share earnings. That is historically very cheap.
None of this means anything about the next week, month or even year. But the longer the horizon, the more appealing these markets look.
