Even though markets are falling quickly, they are rising more and more for longer (ed. 11/2024)

Major U.S. indices break new highs

Although at inbestMe we are not obsessed with constantly monitoring the markets, as we firmly believe that investment decisions should be aligned with personal financial objectives and not with market fluctuations, on special occasions we review the situation of the main stock market indexes.

On this occasion, we do so to highlight that the S&P 500, the index of the 500 largest capitalization companies in the US, has surpassed 6,000 points for the first time in its history. It did so on 11/11/2024, closing at 6,001.35 points.

As can be seen in the chart above, the Dow Jones followed suit by also surpassing the 44,000 point barrier and the Nasdaq 100 surpassed 21,000 points a few days earlier on 7/11/2024.

Considering that the S & P 500 first reached 5,000 points on February 9, 2024, closing at 5,026.61 points, it has taken it 276 calendar days (or 197 market days) to rise 1,000 points, or 20%.

This has occurred in the context of the bull market that began on October 12, 2022. From that date to November 11, 2024, U.S. stock indexes have experienced a remarkable rise, additionally boosted after the U.S. election by the so-called “Trump Rally.” The highlights are from that low:

  • The Nasdaq 100 leads the gains with an impressive 96% increase.
  • It is followed by the S&P 500 and the MSCI World, up 68% and 60%, respectively. It is worth noting that almost 60% of the MSCI World is composed of the S&P 500, which explains the close correlation between the two. For its part, the Dow Jones has recorded a 52% increase.
  • In contrast, the MSCI Europe and emerging markets have recorded more moderate increases of 32% and 30%, respectively. During the “Trump Rally”, these indices have evidenced a notable divergence of around 5% (see chart below) weighed down recently by concerns about the potential negative impact of the MAGA (Make America Great Again) movement linked to Trump’s policies. The market assumed that the policies pushed by the new president could primarily benefit the United States, to the detriment of other regions of the world.

Our equity-heavy portfolios are benefiting from this recovery, with excellent results and returns of up to +18% (this year until October 2024).

For more details on the performance of our portfolios:

See Outstanding portfolio returns at the end of Q3, 2024.

See the historical returns page of our portfolios.

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The global aggregate fixed income index has not yet fully recovered from the declines of 2022.

While equity indices have performed very positively since October 2022, fixed income (represented in the chart below by the global aggregate fixed income (EURO hedged) after falling -15%, has not yet fully recovered and is still down around -8%.

Portfolios composed of a high percentage of fixed income, especially those with long durations such as this index, offered by other management services that did not adjust their durations to adapt to this new context, remain negative since the November 2021 highs.

In contrast, our portfolios of profile 1 and 2 index funds (as well as our pension plan portfolios with the same profile), with a higher weighting in fixed income (apart from the small percentage of equities), have managed to recover thanks to the inbestMe investment committee’s decision to face the new fixed income reality and adopted a strategy of adaptation and reduction of duration, which is since lower than that of the aggregate global bond index (which is very high, at around 6.5 years).

On the other hand, our new 100% bond portfolios and target portfolios created in 2024 are already benefiting from the new situation and normalization of interest rates with positive returns and interesting Yields close to 4%.

Although markets go down fast, they go up longer and longer.

The 2020s will undoubtedly be marked by two major bear markets: the COVID-19 crisis, during which markets experienced a 34% drop in just 33 days (markets can go down very quickly), and the Ukraine war in 2022/2023, which, coupled with escalating inflation caused rapid and steep interest rate hikes in all world economies. This resulted in a prolonged but not as deep bear market, lasting 282 days and down 25%.

In line with these two contrasting periods, we find it an excellent time to review one of our favorite charts and the table below, which we have been updating with data since 1950, in this case through 11/18/2024.

Since 12/10/2022, a new “mountain” has started to be drawn, marking the beginning of a bull market. Although this cycle already totals 768 days, it is still far from reaching the historical average of 2,022 days (5.5 years).

For more cautious investors, it is essential to remember that, although stock markets can fall rapidly (as happened during COVID-19), rallies tend to be more prolonged and sustained. Therefore, it does not make sense to remain disinvested indefinitely.

So far, this latest bull cycle we are experiencing accumulated a return of “only” 65%, well below the historical average of 192% (equivalent to 21% annualized), as shown in the table below.

For the more optimistic, it is important to remember that there is no guarantee that this bull market will reach the historical average. As the data show (see table), averages often hide extremes: bullish cycles can last between 2 and 12 years, while bearish cycles, while averaging 1.1 years, and in some cases can last up to 2.5 years, can seem interminable if we need to dispose of the money during that period. Although downturns tend to last, on average, one-fifth as long as upturns (1.1 years versus 5.5 years), their emotional impact is much greater. Losses tend to generate suffering that doubles the pleasure caused by gains, making downturns a real test for many investors.

Therefore, our investment portfolios must be carefully aligned with our financial objectives and time horizons, as this alignment will ensure that our total wealth is efficiently allocated and, at the same time, protected against the inevitable ups and downs of the financial markets.

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