From the bottom in March 2020, the S&P 500 is now up more than 96 per cent, including dividends. The MSCI world index is up 87 per cent and the Scandinavian markets are not far behind. This year alone, a number of stock market benchmarks are up around 15 per cent, with Stockholm a sweet exception at more than 20 per cent.
Similarly, global high-yield spreads have tightened by some 60 to 80 basis points this year. Measured from the very top in March 2020, they are down by up to 780 basis points (US high yield)! I may be stating the obvious if I point out that this is beyond comparison. It certainly underscores the risk-on attitude that we have been seeing.
And the pandemic is still with us.
As I have commented before, expansionary monetary and fiscal policies and pent-up consumer demand combine to make this a buoyant year in the global economy. The upturn is certainly no mystery. On the other hand, I'd be surprised if you did not ask yourself how long this could last.
“I dare say that's the very nature of the stock market. Which is a much easier prediction than trying to time the market.”
A lot of analysts and commentators certainly do – and have done for quite a while. During the entire upturn, there has been no lack of predictions that we would soon see a stock market correction, meaning a decline of more than 10 per cent. Using Google Trends and looking past the conspicuous spikes in 2018 and 2020, it seems that the search term stock market correction has in fact grown in popularity over the past five years. To some extent, it may be self-perpetuating, with a number of warnings triggering further search for similar analyses.
Of course, they may very well be right. A stock market correction some time during the next half year is not that unlikely. In fact, it never is. Corrections occur with, alas, unpredictable intervals.
Do note, though, where that would take us. If, say, we get a stock market correction in the course of the next six months, you are certain to read about analysts and strategists that got it right, in the process perhaps transforming, retrospectively, "risk of correction" to "prediction of correction".
Unless the fall exceeds some 13-14 per cent, however, you will still be better off for having stayed the course beyond the last New Year's Eve. And, unless there is a really tough crash, you'll be far better off for having been invested over the past year.
So ... the correction warnings may be correct to a t. It's just that they will have been of very limited financial value, possibly making some investors losing out on the far bigger appreciation preceding the correction or crash, for that matter, meaning a fall of more than 20 per cent.
Ain't that just the way that stocks go down, then – falling by a lot less than they have risen? I dare say that's the very nature of the stock market. Which is a much easier prediction than trying to time the market.
Finn Øystein Bergh
Chief Economist & Strategist
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