Taking The Long View

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Market volatility has been extraordinarily high over the last several months. That caused investors to be jittery and worried about their investment portfolios. Fortunately, as we have entered the new year, markets have rallied strongly from the lows and lowered investor concerns.

The late 2018 stock market pullback illustrates that in the heat of the moment investors may lose sight of the long-term view. Understanding long-term trends and performance helps investors to not forget the potential rewards if patient.

Often people focus solely upon US markets, typically the S&P 500 Index. Another perspective is the global equity markets. International “Developed” (such as Europe and Japan) and “Emerging” (such as China and South Korea) equity markets are an important piece of achieving diversification. Academic and private sector research show this diversification helps to push the efficient frontier to a more optimal risk-return outcome.

The index that is representative of an all equity global portfolio is the Morgan Stanley Capital International All-Country World Index (MSCI ACWI). Yes, that’s a mouth-full so let’s call it the “ACWI”. It contains the stocks of companies domiciled and traded in the US market, International Developed, and Emerging market countries, as shown in the below chart.

MSCI ACWI Country Weights

Data from the Morningstar. Chart by Hanlon Investment Management Research Department.

The following graph shows the ACWI total return (performance) starting in 1990, the first full year after its inception date, to the current period of January of 2019. There are two lines; the blue line represents the actual day-to-day price movement of this global equity index, showing the typical volatility associated with equities. The red line connects the beginning and ending values to show the annualized rate of return from the beginning to the end of this equity curve, as well as the long-term trend. The compounded growth rate calculated when connecting the beginning to the end is 7.84% per year. Yes, we all would like to see that trend line (red) replicated in our actual investment portfolios. That’s not how markets (mis)behave! For instance, looking at the end of the blue line one can see the dramatic volatility experienced in Q4 of last year. Over the long-term, however, we all can see the benefit of patience.

Growth Of MSCI ACWI Index Total Return

Data from the Morningstar and Investors FastTrack. Chart by Hanlon Investment Management Research Department.

Many investors will look at this chart and ask why the extreme peaks and valleys? One reason has to do with valuations, whether stocks were priced expensive or cheap at any particular moment.

The recent volatility has converted a market that was by historical standards expensively priced into a market that is historically cheap. You can see on the far-right side of the above chart how the blue line (price) dropped below the long-term trend line (red line). This red trend line presents an interesting measure; when the blue price line is above it stocks could be expensive and when below it could be cheap.

There is another measure of expensive or cheap and that is price-to-earnings ratio (P/E). The 2018 Q4 downside volatility helped to create an historically cheap market. In the following graph we can see that the ACWI ended 2018 at a 14 P/E, a level visited only one other time in the last 25 years.

Year-End MSCI ACWI Index P/E Ratios

Data from Bloomberg. Chart by Hanlon Investment Management Research Department.

The global portfolio (ACWI) produces solid growth in the long view. It is reasonably priced at current levels from a long-term historical context. While volatility will always gain investors’ attention in the short-term, it’s important not to lose sight of the long-term earning potential, as well as the intrinsic value, of the global portfolio. The global equity market, as measured by the ACWI, is currently cheap for long-term investors.

Past performance is not a guarantee of future results. This Educational Series is limited to the dissemination of general information pertaining to its investment advisory services and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock and bond markets involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice. Hanlon has experienced periods of underperformance in the past and may also in the future. Hanlon Investment Management (“Hanlon”) is an SEC registered investment adviser with its principal place of business in the State of New Jersey. Hanlon and its representatives are in compliance with the current registration and notice filing requirement imposed upon registered investment advisers by those states in which Hanlon maintains clients. Hanlon may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by Hanlon with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Hanlon, please contact Hanlon or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Hanlon, including fees and services, send for our disclosure statement as set forth on Form ADV from Hanlon using the contact information herein. Please read the disclosure statement carefully before you invest or send money. Not all Hanlon clients are in the strategies discussed herein.