Fourth time’s the charm for stock bears?

{"text":[[{"start":5.1,"text":"2023 was a good year for holders of stocks. So was 2024. 2025 too. And —despite the US President threatening to invade one of his European allies earlier in the year, a new war in the Middle East that has pushed up oil prices, inflation expectations, and bond yields — 2026 isn’t looking terrible either."}],[{"start":27.4,"text":"MainFT reports today that some investors reckon things just can’t go on like this. Although Bank of America’s monthly poll of fund managers shows a record proportion of fund managers think they definitely can, having newly switched into the bullish camp:"}],[{"start":null,"text":"

"}],[{"start":42.4,"text":"This mass pivot from worrywart to enthusiast takes the share of fund managers self-reporting as overweight stocks to levels not seen any time since January 2022, just when the last bull wave was cresting. So any fun-sponges look like they’re in a smallish minority."}],[{"start":60.4,"text":"But — geopolitics, valuations and equity positioning aside — should we be worried about stocks based solely on the number of consecutive years of double-digit returns?"}],[{"start":69.95,"text":"This might sound like a stupid question. And we’re not sure that it’s not a stupid question. But it is a question that has come up in Alphaville’s earshot more than once. And to be fair, the last time we had three consecutive calendar years of double-digit stock returns, stocks promptly dropped a quarter of their value. So, inspired by a piece of work by Rob Griffiths, an equity strategist at Legal & General, we’ve thrown a couple of charts together."}],[{"start":93.9,"text":"Using total return data from Robert Shiller for US stocks stretching back to 1871, we found 17 instances where three consecutive calendar years recorded double-digit total returns. What happened next?"}],[{"start":null,"text":"

"}],[{"start":108.95,"text":"On 12 of these 17 occasions, year four was . . . another positive year. In fact, the average return in the year following three bumper years came in at 11.2 per cent — pretty bumper itself, compared to the overall 8.6 per cent average."}],[{"start":125.2,"text":"For those of you who consider the years before WWII to be part of the premodern financial era, we’ve coloured-coded returns that fell post-1945 in light blue. And yes, numbers do change somewhat when looking solely at this latter period."}],[{"start":140.15,"text":"Since 1945, year-four positive returns still outnumber negative returns, but only by five to four. The average total return in year-four remains positive, but it drops to 3.3 per cent — far below the average of 9.0 per cent recorded over the same period."}],[{"start":158.6,"text":"Does the answer change if we flip from testing nominal returns to testing real returns? A bit. Inflation-adjusting the tests wipes out a number of pre-1946 bars. But the post-war bars are unch."}],[{"start":null,"text":"

"}],[{"start":171.4,"text":"So overall, since 1871, there have been three consecutive calendar years of double-digit real return on 14 instances. Nine of these were followed by a positive nominal return."}],[{"start":184.6,"text":"Despite having freely chosen to go down this rabbit hole we’re frankly not sure that peering back at patterns in calendar-year returns adds a huge amount of value, or that any sell signal based on this metric has much merit."}],[{"start":197.95,"text":"Bears in search of a better sell signal should head back to Bank of America’s survey, the collective answers to which have persuaded lead strategist Michael Harnett to reckon that the bull capitulation is almost complete and early June is ripe for profit-taking."}],[{"start":218.6,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1779238362_2094.mp3"}