Stocktake

Fri, Jan 6, 2012, 00:00

Historic take:The last decade was an awful one for investors and the new one has had an inauspicious start, with indices tumbling around the world in 2011.

Nevertheless, a new study suggests that long-term investors keep the faith. The study examined annual returns for stocks and bonds in 19 countries from 1900 through 2009. Stocks enjoyed positive real returns and easily trumped bonds in all 19 countries. The lowest stock returns over 10-year, 20-year and 30-year periods were higher than bonds in most countries.

Indeed, stock volatility over long periods is also lower than bond volatility in most countries.

Unfortunately, ordinary investors don’t benefit as they should. US data shows that retail investors were more overweight cash and underweight equities in March 2009 – the bottom of the worst bear market since the 1930s – than at any other stage over the last two decades. The opposite was the case in January 2000, just before the 18-year bull market topped out.

Fear factor: Last August, we remarked that stock volatility was at levels that had marked peaks in past crises such as the Asian financial crisis in 1997, the collapse of Long-term Capital Management in 1998, the 9/11 attacks in 2001 and WorldCom’s 2002 bankruptcy. Sure enough, the Vix, or fear index, topped out at 48, and has now returned to its long-term average (around 20).

The decline has been a steady one. In August, the SP 500 experienced 20 days where the intraday high-low spread exceeded 2 per cent. This fell to 15, 12, nine and four in subsequent months. In Europe, the VStoxx volatility index also recently fell below 30 for the first time in five months and is now only slightly above its long-term average (26).

These declines indicate traders expect reduced near-term volatility. They might be wrong, as they were last July.

Recent thin trading volumes may also be a factor, as might profit-taking among traders who had bet on volatility earlier this year. Sceptics also point out that traders continue to price in volatility for the second half of 2012. Nevertheless, unnerved investors will likely be relieved by the respite, even a temporary one.

Festive rally:A recent column referred to the Santa Claus rally that typically cheers investors at year’s end, and Santa delivered again in 2011.

Why? One recent study found that this trend developed in Britain around 1835, when Christmas became a public holiday. US seasonal strength developed around 1870 – again, when Christmas was designated a public holiday. Indeed, the authors note that year-end strength is most pronounced in countries “where Christianity is strong and/or where people tend to celebrate Christmas”. In other words, even stock markets can’t resist the feel-good factor.