Once again we are in the midst of quarter-end reporting. Across the financial industry everyone is busy preparing and analyzing performance figures through June 30th, 2012. Quite often people look to the “long-term” five year numbers. But today we aren’t looking at just any ordinary five-year number. The five years through June 30th, 2012 incorporates one heck of a wild ride. Rather than just glancing at the numbers in the far-right columns of a return table, it is worth pausing to reflect upon all that has happened.
Turn the clock back five years. The Bush presidency was winding to a close. Hillary Clinton enjoyed a commanding lead over John Edwards and Barrack Obama in opinion polls for the Democratic nomination. Housing prices were near an all-time high and the U.S unemployment rate was 4.5%. The yield on 3-month U.S. T-bills was 5.21%, for the 10-year it was 4.90%. Lehman Brothers employed 26,000 people and its stock price hit an all-time high of $86.18 in February of 2007. Bear Stearns’ stock was north of $140 per share and Bank of America was six months away from purchasing Countrywide Financial. The Arab world had been ruled by the same old men for decades, and Russia’s president was, well, Vladimir Putin.
|Asset Class||Index||5 Year, annualized||Common Period|
|Jul 07 - Jun 12||Jan 88 - Jun 12|
|Large Cap US Stock||S&P 500||0.22%||9.66%|
|Small Cap US Stock||Russell 2000||0.54%||9.63%|
|Developed Int'l Stock||MSCI EAFE||-5.63%||5.04%|
|Emerging Mkt Stock||MSCI EM||0.21%||12.41%|
|Investment Grade US Bonds||Barclays U.S. Aggregate||6.79%||7.31%|
|High Yield US Bonds||Barclays U.S. Corp High Yield||8.45%||8.74%|
|Real Estate||FTSE Nareit All REITs||2.19%||9.82%|
|Cash||Citigroup 3-month T-bill||0.87%||3.84%|
Looking at the five year numbers, what does one notice? Equity markets have been disappointing, falling short of the return on 3-month T-bills and inflation. Investment grade and high-yield bonds have provided decent returns, in line with their historic averages. But averages can be exceedingly deceptive. Do the five year numbers everyone relies upon truly reveal everything we’ve seen in the last five years? What happens if one digs deeper?
Using Zephyr’s StyleADVISOR, I broke the last five years out in to three distinct periods and looked at the cumulative returns during these market cycles. First, we have the private-sector credit crisis, as the housing and consumer debt bubbles burst. This first period stretches from June 2007 until the market bottomed out in February 2009. Next, we have massive, coordinated fiscal and monetary intervention world-wide and markets stage a two-year rally from March 2009 up until April 2011. Finally, from May 2011 to June 2012 we have a second credit crisis, this one driven by public-sector debt. The long-simmering Euro crisis and the debt-ceiling brinksmanship in Washington raise fears of global recession. The numbers are astounding.
|Asset Class||Index||Euro Crisis||Recovery||Credit Crisis|
|May 11 - Jun 12||Mar 09 - Apr 11||Jul 07 - Feb 09|
|Large Cap US Stock||S&P 500||2.52%||93.95%||-49.16%|
|Small Cap US Stock||Russell 2000||-6.13%||128.91%||-52.19%|
|Developed Int'l Stock||MSCI EAFE||-16.85%||94.24%||-53.67%|
|Emerging Mkt Stock||MSCI EM||-19.08%||154.38%||-50.91%|
|Investment Grade US Bonds||Barclays U.S. Aggregate||8.56%||16.24%||10.08%|
|High Yield US Bonds||Barclays U.S. Corp High Yield||6.75%||87.07%||-24.89%|
|Real Estate||FTSE Nareit All REITs||10.55%||170.83%||-62.78%|
|Cash||Citigroup 3-month T-bill||0.06%||0.31%||4.06%|
Do the five year numbers we saw in the first table bear any resemblance at all to the lower table? It’s the same 60 months, just viewed from a different angle.
During the Credit Crisis, investors in equity markets saw around half of their wealth disappear over the span of 20 months. However, the returns nearing or exceeding triple-digits during the bounce-back period meant that most or in some cases all of the losses incurred during the meltdown were recovered if investors stuck to their guns. Today the international equity markets are flirting with bear-market territory; commodities are already there.
What conclusions can one draw from this data? Some might argue that the old “buy-and-hold” strategy is dead; that it makes more sense to time the market. Others might look at this same information and see the risks of market timing, for if the investor gets caught on the wrong side of the market the results can be catastrophic. Certainly, if you want gains you have to be able to tolerate losses.
Ultimately, it will be up to you to draw your own conclusions from the data. But the lesson I’d like to impart is that you can’t simply rely on the standard, basic, off-the-shelf analysis that everyone else is accustomed to using, like the five-year annualized return. You have to dig deeper. This has always been Zephyr’s main strength: the ability to take the same information everyone else has, and be able to gain more insight than everyone else. Our “Market Cycles” and “Market Crisis” templates are available within the template library and on our website to help you.
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