Symmetry Perspectives - Q2 2009

Severe Market Declines – An Update

Last fall we wrote a note discussing the aftermath of severe market declines. The purpose of that commentary was to provide some historical perspective as a guide to what investors might reasonably expect following the massive sell-off in equity markets which occurred in the fall. At the time of writing (Oct. 10, 2008), the S&P/TSX was down 40% from its peak set on June 18, 2008.

While this decline was astonishing it was not without historical precedent and we highlighted all periods since 1920 in which there had been a decline in the S&P/TSX Index of over 30%. These are shown in the attached table (which is updated to the end of June, 2009.)

Prior to the current decline, there had been 7 such periods. The most severe, of course, ushered in the great Depression and the stock market fell over 80% from its high in Sept. 1929 through to the low in June 1932. The average decline including the 1929 –32 period was 43.5% or 37.4% if 1929-32 is excluded. The average time to from peak to trough was 16 months (13 excluding 1929-32). In October, we wrote that “based on the historical experience it seems unlikely that there can be much more downside to the decline, unless, of course, the economy is moving into a very severe recession or depression. It is much more likely, that we are now at or close to approaching the market bottom. The timing of that bottom, however, is difficult to predict – it could happen very soon, or it might not happen for many months to come. One thing that does seem consistent across all periods is that the recovery when it happens comes quickly with the 12-month return from the trough averaging over 35%.”

Since October 10th, the market recorded three successive lows later in October, in November and again on March 9th when it closed at 7,567. If the March low holds (which we think very likely), the total decline from the high on June 18, 2008 will be –49.8%. Since then, the market has recovered quickly posting a return for the 3 months following March 9th of 39.4%. This recovery has been higher than the historical averages and we think that there will likely be a retreat or pause before moving higher. Indeed, at the time of writing (July 6, 2009), the S&P/TSX Index is now at 10,000, after having reached over 10,700 in mid-June.

In order for the index to attain its prior peak level of over 15,000, the market must gain almost 100% from the March trough. At 10,000, it is one-third of the way there in just 4 months. But, from 10,000 it must appreciate another 50% to reach the prior peak. The average trough to peak recovery time has been 65 months. If it takes five years to reach 15,000, the compound annual price appreciation over the period would be 8.5%, a return that is comfortably above the long-term average of 5.3% p.a. On the other hand, if the recovery takes as long as it did following the Great Depression (another 18.5 years), the resulting compound price return would be 2.2% p.a. Given the current dividend yield on the S&P/TSX is 3.5%, “worst case” total returns for the S&P/TSX over the next 5 to 10 years are likely in the vicinity of 5-6 % per annum while expected returns (based on historical average recovery time) are considerably higher (10-15% p.a.) and above the long term historical averages (8-10% p.a.).

With cash holdings at record levels, many investors must now be wondering if they have missed the boat. Is it too late to climb on board? The answer will ultimately depend on the strength of the economic recovery and the impact that will have on corporate earnings. However, the historical experience suggests that there will be more gains to come and that equity returns over the next five to ten years are likely to prove rewarding.

Symmetry investors are advised to stick with their long-term allocation. Those with a longer-term investment horizon will find Symmetry One Growth (an 80% equity allocation) or Symmetry One Balanced Growth (65% equity allocation) well positioned to benefit from expected equity market appreciation. Investors in Symmetry One Balanced (50% equity) and Symmetry One Conservative Portfolios (35% equity) will also gain from equity appreciation but as they have a higher allocation to bonds expected returns are lower but with lower levels of volatility. As such, these Portfolios are good choices for those that are more risk averse or have a shorter investment time horizon.

 

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